-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BvzEX1cmSdMjaXfPGA3N8JNW2x4o1xSdRy6e7LkFZB2kZE8xZWl75U6b6oSj0w7q gsxqUAXGGVAyqL1G8tVonA== 0000950144-98-003407.txt : 19980330 0000950144-98-003407.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950144-98-003407 CONFORMED SUBMISSION TYPE: 10-KT PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980327 SROS: BSE SROS: CSX SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOWERS INDUSTRIES INC /GA CENTRAL INDEX KEY: 0000826227 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 580244940 STATE OF INCORPORATION: GA FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: 10-KT SEC ACT: SEC FILE NUMBER: 001-09787 FILM NUMBER: 98576354 BUSINESS ADDRESS: STREET 1: US HWY 19 STREET 2: P O BOX 1338 CITY: THOMASVILLE STATE: GA ZIP: 31792 BUSINESS PHONE: 9122269110 MAIL ADDRESS: STREET 1: PO BOX 1338 200 US HIGHWAY 19 S CITY: THOMASVILLE STATE: GA ZIP: 31792 FORMER COMPANY: FORMER CONFORMED NAME: FLOWERS INDUSTRIES OF GEORGIA INC DATE OF NAME CHANGE: 19871220 10-KT 1 FLOWERS INDUSTRIES, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JUNE 29, 1997 TO JANUARY 3, 1998
COMMISSION FILE NUMBER 1-9787 FLOWERS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-0244940 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1919 FLOWERS CIRCLE THOMASVILLE, GEORGIA 31757 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (912) 226-9110 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.625 PAR VALUE, TOGETHER WITH PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price on the New York Stock Exchange on March 23, 1998: $2,137,422,400 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
TITLE OF EACH CLASS OUTSTANDING AT MARCH 23, 1998 ------------------- ----------------------------- COMMON STOCK, $.625 PAR VALUE 90,809,227
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 OF KEEBLER FOODS COMPANY, A DELAWARE CORPORATION. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] ================================================================================ 2 FORM 10-K TRANSITION REPORT TABLE OF CONTENTS
SEQUENTIAL PAGE ---------- PART I ITEM NO. 1. Business.................................................... 1 2. Properties.................................................. 12 3. Legal Proceedings........................................... 13 4. Submission of Matters to a Vote of Security Holders......... 13 PART II ITEM NO. 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 13 6. Selected Financial Data..................................... 14 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 15 8. Financial Statements and Supplementary Data................. 21 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 21 PART III ITEM NO. 10. Directors and Executive Officers of the Registrant.......... 22 11. Executive Compensation...................................... 25 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 30 13. Certain Relationships and Related Transactions.............. 32 PART IV ITEM NO. 14. Exhibits, Financial Statement Schedules, and Report on Form 8-K......................................................... 32
(i) 3 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The registrant incorporates by reference into this Transition Report on Form 10-K for the transition period ended January 3, 1998, certain portions of the Annual Report on Form 10-K of Keebler Foods Company for its fiscal year ended January 3, 1998, filed with the Securities and Exchange Commission on March 20, 1998 (File No. 001-13705) (the "Keebler Form 10-K"), as follows:
ITEM OF FLOWERS TRANSITION ITEM OF KEEBLER ANNUAL REPORT REPORT ON FORM 10-K INTO ON FORM 10-K BEING WHICH INFORMATION IS BEING INCORPORATED BY REFERENCE INCORPORATED BY REFERENCE ----------------------------- -------------------------- PART I PART I Item 1. Business.................. Item 1. Business Item 2. Properties................ Item 2. Properties PART II PART II Item 6. Selected Financial Data... Item 6. Selected Financial Data Item 7. Management's Discussion Item 7. Management's Discussion and Analysis of Financial and Analysis of Financial Condition and Results of Condition and Results of Operations................ Operations
(ii) 4 PART I ITEM 1. BUSINESS As used herein, unless the context otherwise indicates, (i) "Flowers" means Flowers Industries, Inc., a Georgia corporation and its consolidated subsidiaries, excluding Keebler Foods Company, a Delaware corporation, and its consolidated subsidiaries ("Keebler"); and (ii) the "Company" means Flowers and Keebler, collectively. Unless stated otherwise, figures provided for market share percentages and rank in any market are based on retail sales (measured in dollars) in 1997 as reported by Information Resources, Inc. ("IRI"), which tracks retail sales through scanner data in United States grocery stores with annual revenue greater than $2.0 million. The IRI data excludes sales through other channels in which the Company operates and, therefore, may overstate or understate the Company's share of particular product lines in the baked foods market. See "Business -- Products." In January 1998, the Company changed its fiscal year end from the Saturday nearest June 30 to the Saturday nearest December 31. Unless stated otherwise, all references to (i) "fiscal year 1997" shall mean Flowers' full fiscal year ended June 28, 1997, (ii) "fiscal year 1998" shall mean Flowers' full fiscal year ending January 2, 1999, and (iii) "transition period 1998" shall mean Flowers' 27 week transition period from June 29, 1997 through January 3, 1998. THE COMPANY The Company is the largest nationally branded producer and marketer of a full line of baked foods in the United States, with products which include Flowers Bakeries' fresh breads and rolls, Mrs. Smith's Bakeries' fresh and frozen baked desserts, snacks, breads and rolls, as well as Keebler's cookies and crackers. Since its founding in 1919 in Thomasville, Georgia, the Company has dramatically expanded the diversity and geographic scope of its operations and is now a leader in the market for baked foods throughout the United States. The Company's core strategy is to be the country's leading low-cost producer and marketer of a full line of branded fresh and frozen baked products on a national and super-regional basis, serving all possible customers, through all channels of distribution. This strategy is focused on responding to current market trends for the Company's products and changing consumer preferences, which now increasingly favor purchases of ready-made convenience food products as opposed to traditional home-prepared foods. To assist in accomplishing this core strategy, the Company has aggressively invested capital to modernize and expand its plant and equipment capacity and has acquired nationally branded businesses which complement its traditional strengths. It has also continually improved its distribution systems and has established a presence in all distribution channels where baked foods are sold, including restaurants, fast-food chains, food wholesalers, institutions and vending machines, as well as grocery stores. In the fresh baked product line (Flowers Bakeries), the Company focuses on the production and marketing of baked foods to customers in the super-regional 19 state area in and surrounding the southeastern United States. In this effort, the Company has devoted significant resources to modernizing production facilities and improving its distribution capabilities, as well as actively marketing well-recognized brands such as Nature's Own and Cobblestone Mill bread. Since 1980, the Company has acquired 24 local bakery operations which are generally within or contiguous to its existing region and which can be served with its extensive direct-to-store sales and distribution system (a "DSD system"). The Company's strategy is to use acquisitions to better serve new and existing customers, principally by increasing the productivity and efficiency of newly acquired plants, establishing reciprocal baking arrangements among its bakeries, and by extending its DSD system. Flowers Bakeries' DSD system utilizes approximately 3,100 independent distributors who own the right to sell the Company's fresh baked products within their respective territories. The Company's frozen baked foods operations (Mrs. Smith's Bakeries) began in the mid-1970s with the acquisition of the Stilwell business, with frozen products initially marketed to customers in the southeastern and southwestern United States. In 1989, the Company entered the frozen bread and dough market in the southeastern United States with its acquisition of the bakery operations of Winn-Dixie, Inc. In 1991, the 1 5 Company undertook its first significant entry into the national market for frozen baked dessert products with the acquisition of Pies, Inc., a midwest-based producer of premium pies for the restaurant and foodservice markets, and further expanded its national presence by acquiring the Oregon Farms branded frozen carrot cake line. In May 1996, the Company obtained a leading presence in the frozen baked dessert category with the acquisition of the business of Mrs. Smith's Inc., which is the leading national brand of frozen pies sold at retail. In January 1998, the Company launched "Operation 365," a strategy aimed at significantly expanding year-round sales in the frozen dessert baked product category through product line extensions designed to take advantage of nationwide consumer recognition of the Mrs. Smith's brand name. Examples of significant product line extensions that are underway include Mrs. Smith's retail frozen fruit cobblers and Mrs. Smith's "Restaurant Classics" retail frozen pies. The Company entered the cookies and crackers marketplace in January 1996 by acquiring for $62.5 million an approximate 45% stake in Keebler, the number two producer and marketer of cookies and crackers in the United States with net sales of approximately $2.1 billion for the fiscal year ended January 3, 1998. In June 1996, Keebler acquired Sunshine Biscuits, Inc. ("Sunshine"), the third largest cookie and cracker producer in the United States. By the end of 1996, Keebler completed its planned integration of Sunshine's operations, achieving efficiencies in administration, purchasing, production, marketing, sales and distribution. Under the control of Flowers and its co-investors, Keebler's results of operations have improved from a net loss of $158.3 million for its fiscal year ended December 30, 1995, to a net income of $57.0 million for its fiscal year ended January 3, 1998. On February 3, 1998, Keebler completed its initial public offering in which Flowers' co-investors sold a portion of their shares to the public. Concurrent with that offering, Flowers purchased an additional 11% of Keebler from its co-investors for approximately $309 million, thereby increasing its ownership to approximately 55% of the total Keebler shares outstanding (the "Keebler Acquisition"). The Company has a leading presence in each of the major product categories in which it competes. Flowers Bakeries' fresh baked branded bread and roll sales rank first in ten of its 15 major metropolitan markets and second in its remaining five such markets, and its Nature's Own brand is the number one volume brand of wheat/variety bread in the country despite being marketed solely in the super-regional 19 state area in and surrounding the southeastern United States. Mrs. Smith's Bakeries is one of the leading frozen baked dessert producers and marketers in the United States, and its Mrs. Smith's pies are the leading national brand of frozen pies sold at retail. Keebler is the number two producer and marketer of branded cookies and crackers, the number one producer and marketer of private label cookies and the number one producer and marketer of cookies and crackers for the foodservice market. The Company's major branded products include, among others, the following:
FLOWERS BAKERIES MRS. SMITH'S BAKERIES KEEBLER FRESH BAKED PRODUCTS FRESH AND FROZEN BAKED PRODUCTS COOKIES AND CRACKERS -------------------- ------------------------------- -------------------- Flowers Mrs. Smith's Keebler Brands: Nature's Own Mrs. Smith's Restaurant Classics - Chips Deluxe Whitewheat Mrs. Smith's Special Recipe - Pecan Sandies Cobblestone Mill Mrs. Freshley's - Fudge Shoppe Dandee Oregon Farms - Town House Evangeline Maid European Bakers, Ltd. - Club Betsy Ross Stilwell - Graham Selects ButterKrust Our Special Touch - Wheatables BlueBird Danish Kitchen - Zesta Licensed Brands: Pour-A-Quiche Cheez-It - - Sunbeam Carr's - - Roman Meal Vienna Fingers - - Country Hearth Hydrox - - Bunny Sunshine Krispy - - Holsum Hi-Ho Ready Crust
The Company is committed to being the low cost producer in all of its operations and has made significant capital investments in recent years to modernize, automate and expand its production and 2 6 distribution capabilities. Flowers has invested approximately $377 million over the past six years, of which approximately $227 million was used to expand and modernize existing production facilities for Flowers Bakeries, including the addition of twelve new highly-automated production lines in nine facilities. The remaining approximately $150 million was used primarily to build a state-of-the-art distribution facility, and to add 13 highly-automated production lines in nine facilities for Mrs. Smith's Bakeries. Since Flowers' initial investment in Keebler in January 1996, Keebler has invested approximately $78 million to streamline and rationalize its production operations in order to better support its national DSD system. In order to provide prompt and responsive service to its consumers, the Company tailors its distribution systems to the marketing and production aspects of its major product lines. Flowers Bakeries distributes its fresh baked foods through an extensive DSD system of approximately 3,100 independent distributors who, as owners of their territories, are motivated to maintain and build shelf space and to monitor product freshness, which is essential in the marketing of short shelf life products such as fresh bread, rolls and buns. These distributors make an aggregate of approximately 70,000 stops per day. Mrs. Smith's Bakeries' frozen foods are distributed through its two strategically-located frozen distribution facilities, as well as through additional commercial frozen warehouse space throughout the United States, in order to accommodate inventory growth in seasonal products and to provide staging to expedite distribution throughout the year. Keebler's cookies and crackers are distributed through a DSD system designed to maximize customer service and Keebler's control over the availability and presentation of products. Keebler's DSD system employees distribute products to approximately 30,000 retail locations, principally supermarkets. Keebler is one of only two cookie and cracker companies that own and operate a national DSD system. INDUSTRY OVERVIEW The United States baked foods industry is comprised of a number of distinct product lines, including fresh baked foods (fresh breads, rolls and buns), refrigerated and frozen baked foods (desserts, snacks, breads and doughs) and cookies and crackers. Changes in consumer preferences have shifted food purchases away from the traditional grocery store aisles for home preparation and consumption, and toward home meal replacement purchases, either in supermarkets' in-store deli/bakeries or in non-supermarket channels, such as mass merchandisers, convenience stores, club stores, restaurants and other convenience channels. Non-supermarket channels of distribution are becoming increasingly important throughout the baked foods industry. Fresh Baked Foods In 1997, retail bread sales in the United States were approximately $5 billion, according to IRI, which tracks retail sales through scanner data in United States grocery stores with annual revenue greater than $2.0 million. In the last decade, retail sales of fresh breads have experienced modest growth, with expansion occurring primarily in a variety of premium and specialty breads. In addition to Flowers Bakeries, several large baking and diversified food companies market fresh baked foods in the United States. Competitors in this category include Interstate Bakeries Corporation ("Interstate"), The Earthgrains Company ("Earthgrains"), Bestfoods, formerly CPC International Inc. ("Bestfoods") and Pepperidge Farm Inc. ("Pepperidge Farm"). There are also a number of smaller, regional baking companies. The Company believes that the larger companies enjoy several competitive advantages over smaller operations, due principally to economies of scale in areas such as purchasing, production, advertising, marketing and distribution, as well as through greater brand awareness. A significant trend in the fresh baked foods industry over the last several years has been the consolidation of smaller bakeries into larger baking businesses. Consolidation, which has reduced industry capacity, continues to be driven by factors such as capital constraints on smaller bakeries, which limit their ability to avoid technological obsolescence, to increase productivity or to develop new products, generational changes at family-owned businesses, and the need to serve super-regional grocery store chains. The Company believes that the consolidation trend in the fresh baked foods industry will continue to present opportunities for strategic acquisitions that complement its existing businesses and that extend its regional presence. 3 7 Frozen Baked Foods The United States frozen and refrigerated baked foods industry, including desserts, breads, rolls and doughs, had 1997 sales of approximately $7 billion, according to estimates compiled for the February 1998 edition of Refrigerated and Frozen Foods, an industry trade publication. While retail sales of frozen baked desserts have declined by approximately 9% since 1992, sales of frozen baked foods to other distribution channels, including restaurants and other foodservice institutions, have grown significantly over the same period, including a cumulative 23% increase in sales of foodservice desserts and a 50% increase in sales at in-store deli/bakeries. Primary competitors in the frozen baked desserts category include The Pillsbury Co. ("Pillsbury"), Sara Lee Bakery ("Sara Lee"), Rich Products Corp. ("Rich Products"), Edwards Baking Co. ("Edwards") and Pepperidge Farm. Cookies and Crackers The United States cookie and cracker industry had 1997 retail sales of approximately $8.3 billion. Since 1992, consumption per person of cookies and crackers in the United States has remained stable. The cookie and cracker industry is comprised of distinct product segments. Cookie segments include, among others, sandwich cookies, chocolate chip cookies and fudge-covered cookies. Cracker segments include among others, saltine crackers, graham crackers and snack crackers. Supermarkets accounted for approximately 78% of 1996 retail sales in the cookie and cracker industry with mass merchandisers, convenience stores, and drug stores accounting for most of the balance. Since 1992, United States annual dollar supermarket sales of cookies and crackers have increased an average of 1.5% per year. Keebler and Nabisco, Inc. ("Nabisco") are the two largest national participants in the cookie and cracker industry. Keebler and Nabisco have a combined market share of approximately 58%, with Keebler having approximately 24% and Nabisco having approximately 34%. Other participants in the industry generally operate only in certain regions of the United States or only participate in a limited number of segments of the industry. BUSINESS STRATEGY The Company's strategy is to be the country's leading low-cost producer and marketer of a full-line of branded fresh and frozen baked foods products on a national and super-regional basis serving all possible customers through all channels of distribution. Flowers Bakeries, Mrs. Smith's Bakeries and Keebler each develop separate strategies based on the production, distribution and marketing requirements of its particular baked foods category. The Company employs the following five overall strategies: - Strong Brand Recognition. The Company intends to capitalize on the success of its well-recognized brand names, which communicate product consistency and high quality, through extending those brand names to additional products and categories. Among other strategies, the Company will continue to extend the Mrs. Smith's brand to additional frozen baked products, expand the use of the Cheez-It brand name and develop new products under the Keebler brand name. Many of the Company's products, including its Nature's Own bread, Mrs. Smith's retail frozen baked pies and Cheez-It snack crackers, are the top-selling brands in their categories. Flowers Bakeries' fresh baked branded bread and roll sales rank first in ten of its 15 major metropolitan markets and second in its remaining five such markets. Keebler brand cookies rank second overall in the United States, with eight of the 25 best-selling cookies and ten of the 25 best-selling crackers in the United States based on dollar sales. 4 8 - State-of-the-Art Production and Distribution Facilities. The Company intends to maintain a continuing level of capital improvements that will permit it to fulfill its commitment to remain among the most modern and efficient baked foods producers in the United States. Toward this goal, Flowers has invested approximately $377 million in Flowers Bakeries and Mrs. Smith's Bakeries in the six-year period ended June 28, 1997 to build several modern and highly efficient production facilities and a state-of-the-art distribution facility, as well as to automate and modernize its existing facilities. Since Flowers' initial investment in Keebler in January 1996, Keebler has spent approximately $78 million to keep its operations modern and efficient and has lowered its operating costs by closing plants, consolidating production and reducing overhead. - Efficient and Customer Service-Oriented Distribution. The Company intends to expand and refine its distribution systems to allow it to respond quickly and efficiently to changing customer service needs, consumer preferences and seasonal demands. In the last decade, the Company has developed distribution systems that are tailored to the nature of each of its three baked food product categories and are designed to provide the highest levels of service to retail and foodservice customers. Flowers Bakeries has developed a DSD network of approximately 3,100 independent distributors for its fresh baked products, who make an aggregate of approximately 70,000 stops per day. Mrs. Smith's Bakeries operates a network of strategically located storage and distribution facilities for its frozen baked products and a centralized distribution facility for its fresh baked snack products. Keebler operates its own national DSD system for its cookie and cracker products, enabling it to provide frequent service to over 30,000 retail customers. - Broad Range of Products and Sales Channels. In recognition that consumers are increasingly seeking home meal replacements and other convenience food products, the Company intends to continue to emphasize expansion of its product lines and sales channels to meet those preferences. The Company's product lines now include virtually every category of baked foods, including fresh and frozen bread, buns, rolls, pies, cakes, and other baked snacks and desserts, as well as cookies and crackers. The Company's products generally can be found in all baked food distribution channels, including traditional supermarkets and their in-store deli/bakeries, convenience stores, mass merchandisers, club stores, wholesalers, restaurants, fast food outlets, schools, hospitals and vending machines. The Company intends to continue to increase its focus on non-supermarket channels, such as restaurants, mass merchandisers and convenience stores. - Strategic Acquisitions. The Company intends to continue to pursue growth through strategic acquisitions and investments that will complement and expand its existing markets, product lines and product categories. The Company has consistently pursued growth in sales, geographic markets and products through strategic acquisitions and has completed over 75 acquisitions in 30 years. Most recently, Flowers continued its regional expansion in fresh baked foods with its January 1998 acquisition of Franklin Baking Company, a regional bakery based in North Carolina. The Company expanded its frozen baked foods product line with the 1996 acquisition of Mrs. Smith's, Inc. and the well-recognized Mrs. Smith's national brand. In February 1998, the Company obtained a controlling interest in Keebler, the second largest cookie and cracker producer and marketer in the United States. PRODUCTS The Company produces baked foods in three product lines: fresh baked foods, frozen baked foods and cookies and crackers. Fresh Baked Foods -- Flowers Bakeries In 1997, Flowers Bakeries was the leading producer of fresh baked foods in ten of its major markets and second in five of its major markets and was developing its presence in the other markets it has recently entered. The Company's fresh baked foods market includes 19 states in the eastern, southeastern and south central United States. 5 9 The Company markets its fresh soft variety and white breads under numerous brand names, including Flowers, Nature's Own, Whitewheat, Cobblestone Mill, Dandee, Evangeline Maid, Betsy Ross, ButterKrust and Purity, among others. Within licensed geographic territories, the Company also markets fresh bread under the Sunbeam, Roman Meal, Country Hearth, Bunny and Holsum trademarks. Nature's Own is the best selling brand by volume of soft variety bread in the United States, despite being marketed solely in the 19 state super-region in and surrounding the southeastern United States. Rolls and buns are marketed under the Cobblestone Mill, European Bakers, Ltd., Breads International and other brand names. Flowers Bakeries has used its strong brand recognition to expand to new product lines, such as the successful introduction of Cobblestone Mill Breakfast Breads. Fresh baked snack cakes, doughnuts, pastries and other sweet snacks are sold primarily under the BlueBird brand, as well as ButterKrust, Sunbeam, and Holsum. In addition to its branded products, Flowers Bakeries also packages baked foods under private labels for such retailers as Winn-Dixie. While private label products carry lower margins than its branded products, Flowers Bakeries is able to use its private label offerings to expand its total shelf space and to effectively maximize capacity utilization. The Company also supplies numerous restaurants, institutions and foodservice companies with fresh bread products, including Burger King, Krystal, Arby's, Outback Steakhouse, Olive Garden, Dairy Queen and Chili's. In May 1995, the Company became a preferred supplier to Burger King and currently supplies baked products to approximately 1,700 Burger King restaurants in the Southeast. The Company also sells fresh baked products to wholesale distributors for ultimate sale to a wide variety of food outlets. Frozen Baked Foods -- Mrs. Smith's Bakeries Mrs. Smith's Bakeries and Sara Lee each have an approximately 25% market share of the frozen baked dessert market, representing the two largest shares of that market. Mrs. Smith's frozen baked pies were the number one retail frozen brand pies in the U.S. for 1997 with an approximate 53% market share, according to IRI. The Company's frozen baked foods are marketed throughout the United States, and, based on consumer surveys commissioned by the Company, Mrs. Smith's enjoys a 94% brand awareness in United States households. The Company's frozen pies, cakes, cobblers and other baked desserts are sold under the Mrs. Smith's, Mrs. Smith's Restaurant Classics, Mrs. Smith's Special Recipe, Oregon Farms and Stilwell brand names in the frozen foods sections of supermarkets, as are the Company's frozen pie shells, mixed fruits and quiche fillings. The Company has also introduced a line of frozen baked desserts and cobblers that feature low fat crusts and no-sugar-added fruit fillings. The Company's frozen baked products also include specialty baked and parbaked (partially baked) breads, buns, and rolls marketed under the European Bakers, Ltd. and Our Special Touch brands, which are sold at retail. The Company also co-packs these and other fresh bakery snack food products on behalf of other industry participants who sell these products under their own proprietary brand names. The Company produces frozen pies, cakes and desserts as well as bread, rolls and buns for sale to foodservice customers, wholesalers, such as Sysco, and markets fresh and frozen hearth-baked specialty bread, breadsticks and rolls to chain restaurants such as Outback Steakhouse and Olive Garden. Traditionally, frozen pie sales are heavily concentrated throughout the year-end holiday season. The Company has recently launched "Operation 365," a strategy aimed at significantly expanding non-seasonal sales in the frozen baked product line by introducing new products under the Mrs. Smith's brand, thereby extending the well-recognized Mrs. Smith's brand name to existing and related products. The Company's newest introduction is Mrs. Smith's Restaurant Classics, which are frozen premium, restaurant-quality cream pies sold at retail. Mrs. Smith's Bakeries also produces fresh baked snack products under the Mrs. Freshley's brand, such as donuts, honeybuns, cream horns, pecan spins, jelly rolls and cinnamon buns for sale as single packs in vending machines and in multi-packs marketed through grocery stores and mass merchandisers as center aisle promotions. In addition, Mrs. Smith's Bakeries sells these same products to Flowers, which distributes them 6 10 under its BlueBird brand. Mrs. Smith's Bakeries produces fresh baked snack foods at some of its production facilities in order to maximize the use of capacity. Cookies and Crackers -- Keebler Keebler is the second largest cookie and cracker producer in the United States with annual net sales of approximately $2.0 billion and an approximate 24% share of the United States cookie and cracker market. In the United States, Keebler is the number two producer and marketer of branded cookies and crackers, the number one producer of private label cookies and the number one producer of cookies and crackers for the foodservice market. Keebler produces eight of the 25 best-selling cookies and ten of the 25 best-selling crackers in the United States based on dollar sales. Keebler's branded cookie and cracker products include, among others, Chips Deluxe cookies, Pecan Sandies cookies, Fudge Shoppe cookies, Town House crackers, Club crackers, Graham Selects crackers, Wheatables crackers, Zesta crackers, Cheez-It crackers, Cheez-It party mix, Nacho Cheez-It crackers, Carr's biscuits, Vienna Fingers cookies, Hydrox cookies, Sunshine Krispy crackers and Hi-Ho crackers. In addition, Keebler is the number one producer and marketer of retail branded ice cream cones in the United States, and a major producer of retail branded pie crusts. Keebler also produces custom-baked products, such as Nutri-Grain breakfast bars, for other marketers of branded food products, and private label cookies and crackers to be sold by retailers under their own brands. MANUFACTURING AND DISTRIBUTION The Company designs its production facilities and distribution systems to meet the marketing and production demands of its major product lines. Through a significant program of capital improvements and careful planning of plant locations, which, among other things, allows the Company to establish reciprocal baking arrangements among its bakeries, the Company seeks to remain the country's leading low cost producer and marketer of branded fresh and frozen baked products on a national and super-regional basis and to provide the highest quality customer service. In addition to the independent distributor system for its fresh baked products and the DSD system used for Keebler, the Company also uses both owned and public warehouses and distribution centers in central locations for the distribution of certain of its frozen and other shelf stable products. Fresh Baked Foods -- Flowers Bakeries Flowers owns and operates 27 fresh bread and bun bakeries in 10 states. Flowers has invested approximately $227 million over the past six years, primarily to build new state-of-the-art baking facilities and to significantly upgrade existing facilities. During this period, Flowers has added twelve new highly-automated production lines in nine of its facilities. The Company believes that these investments, undertaken at a time when many competitors were minimizing capital improvements due to leverage or earnings pressure, have made Flowers the most efficient major producer of fresh baked foods in the United States. Flowers believes that its capital investment yields long-term benefits in the form of more consistent product quality, highly sanitary processes, and greater production volume at a lower cost per unit. While its major capital improvement program is largely complete, Flowers intends to continue to invest in its plant and equipment to maintain the highest levels of efficiency. Distribution of fresh baked foods involves determining appropriate order levels, delivering the product from the plant to the customer, stocking the product on the shelves, visiting the customer one to three times daily to ensure that inventory levels remain adequate, and removing stale goods. In 1986, Flowers Bakeries began converting its bakery sales routes from employees operating company-owned vehicles to a DSD system of exclusive independent distributors. The Company effected this change by selling its sales routes primarily to its sales employees. The Company initially financed these purchases over ten years, which obligations were sold to a financial institution in 1996. Currently, all distributor purchase arrangements are made directly with a financial institution, and, pursuant to an agreement, the Company manages and services these arrangements. The distributors lease hand-held computers from the Company, which contain software proprietary to the Company. The software permits distributors to track and communicate inventory data to the production 7 11 facilities and to calculate recommended order levels based on historical sales data and recent trends. These orders are electronically transmitted to the appropriate production facility on a nightly basis. This system, which management believes is more sophisticated than comparable tracking programs currently used in the industry, is designed to ensure that adequate product, and the right mix of products, are available to meet the retail and foodservice customer's immediate needs. Management believes the system minimizes returns of unsold goods. In addition to the hand-held distributor units, the Company's main computer system permits tracking of sales, product returns and profitability by customer location, plant, day and other bases. Managers receive sales and profitability reports on a weekly basis, allowing prompt operational adjustments when appropriate. Management believes that the Company's independent distributor system is unique in the industry as to its size, with approximately 3,100 distributors, and with respect to its super-regional scope. In Flowers Bakeries' DSD System, an aggregate of over 70,000 stops are made each day. The program is designed to provide the Company's retailers with superior service because distributors, highly motivated by route ownership, strive to increase sales by maximizing service. In turn, distributors have the opportunity to benefit directly from the enhanced value of their routes resulting from higher sales volume. Frozen Baked Foods -- Mrs. Smith's Bakeries Mrs. Smith's Bakeries operates 13 production facilities with 67 production lines for its pies, cakes, breads, rolls and snack foods. The Company maintains maximum operating efficiency by producing high volume fresh snack products on long runs to complement its branded frozen baked products, sales of which are seasonal in nature. In the past six years, the Company has invested approximately $150 million to upgrade its frozen baked foods production and distribution facilities, primarily by adding 13 highly-automated production lines in nine facilities and to construct its 225,000 square foot highly-automated frozen distribution facility in Suwanee, Georgia. In addition, Mrs. Smith's Bakeries is nearing completion of installation of the SAP/R3 operating system, which the Company believes will provide it with competitive advantages in inventory tracking and distribution. The Company plans to invest approximately $40 million over fiscal 1998 and 1999 in renovations to improve efficiencies at several of its frozen food bakeries. Mrs. Smith's Bakeries' distribution facilities are strategically located near its production facilities to simplify distribution logistics and shorten delivery times. The plant in Stilwell, Oklahoma is an efficient facility which serves as a principal point of distribution for the Company's products throughout the central, southwestern and western United States. The state-of-the-art Suwanee distribution facility is located on a major interstate corridor near four of Mrs. Smith's Bakeries' frozen dessert production facilities. This facility opened in 1995 and contains such innovations as five 78-foot tall, laser-guided cranes specifically designed for the facility, a six million cubic foot freezer, and computer-controlled bar-coding and inventorying. The automation of this facility enables Mrs. Smith's Bakeries to move extremely large volumes of product without a significant labor component and enables the facility to operate with extremely cold temperatures that preserve high product quality. In addition to cost efficiencies, these features allow the Suwanee facility to better serve customers by processing customer orders much more quickly than conventional freezer facilities. This facility's frozen storage capacity will be expanded in 1998 and production capacity is intended to be added on-site to expand Mrs. Smith's Bakeries' production capacity and to enhance operating efficiencies by having contiguous production and frozen storage. In addition to Mrs. Smith's Bakeries' two strategically-located freezer and distribution facilities in Suwanee and Stilwell, the Company leases additional freezer and distribution facilities on the West Coast to facilitate distribution of its products nationwide. These owned and leased facilities allow the Company to build and store necessary inventory in seasonal products, and to expedite the national distribution of both its seasonal and non-seasonal products. Mrs. Smith's Bakeries distributes its fresh baked snack products from a centralized distribution facility located near Knoxville, Tennessee. Centralized distribution allows the Company to achieve both production and distributing efficiencies. The production facilities are able to operate longer, more efficient production runs 8 12 of a single product, which are then shipped to the centralized distribution facility. Products coming from different production facilities are then cross-docked and shipped directly to customer warehouses. Cookies and Crackers -- Keebler Keebler attempts to meet the changing demands of its customers by planning appropriate stock levels and optimal delivery times. To achieve these objectives, Keebler has developed a network of modern and efficient production facilities with contiguous or strategically located shipping centers and distribution warehouses. Keebler owns and operates eleven production facilities located throughout the United States. Keebler also owns and operates a dairy in Fremont, Ohio that produces cheese under a proprietary formula which is used as an ingredient in Cheez-It crackers. Keebler's distribution facilities consist of eleven shipping centers attached to the production facilities, nine separate shipping centers (two owned and seven leased) and 67 distribution centers (twelve owned and 55 leased, 14 of which are idle or subleased) throughout the United States. Keebler also leases 30 warehouses and 17 depots that are located throughout the United States and are utilized by the sales force in the distribution of Keebler's products. Keebler directly services approximately 30,000 retail customers through its DSD distribution system, which system employs more than 3,200 persons. Keebler's DSD distribution system distributes its retail branded cookie and cracker products directly to the retail location, where these products are then merchandised by Keebler's own sales force. Members of Keebler's sales force visit retail outlets an average of 2.8 times per week per store, meeting directly with and taking orders from store managers and arranging for extra in- store display space. Keebler's trucks then deliver the orders directly to such retail outlets, where members of Keebler's sales force, rather than store employees, stock and arrange its products on the retailers' shelves and build end-aisle and free standing displays within the stores. While strengthening relationships with retailers, the frequent store presence of Keebler's sales force also allows it to oversee and execute Keebler's in-store promotional programs. In addition, it provides Keebler with the ability to monitor competitors' in-store product promotions. Keebler uses its DSD distribution system exclusively to serve supermarkets and mass merchandisers. In the case of club stores and foodservice distributors, Keebler uses a dedicated sales force and ships its products directly to the customers' warehouses. Convenience stores and vending distributors are served using a network of independent distributors. CUSTOMERS Fresh Baked Foods -- Flowers Bakeries The Company's fresh baked foods have a highly diversified customer base, which includes grocery retailers, restaurants, fast-food chains, food wholesalers, institutions, and vending companies. Flowers Bakeries also sells returned and surplus product through a system of independently operated thrift outlets. The Company also supplies numerous restaurants, institutions and foodservice companies with fresh bread products, including buns for fast-food outlets such as Burger King, Krystal, Arby's, Outback Steakhouse, Olive Garden, Dairy Queen and Chili's. In May 1995, the Company became a preferred supplier to Burger King and currently supplies baked products to approximately 1,700 Burger King restaurants in the Southeast. The Company also sells fresh baked products to wholesale distributors such as Sysco for ultimate sale to a wide variety of food outlets. Winn-Dixie is Flowers Bakeries' largest customer for fresh baked foods. Frozen Baked Foods -- Mrs. Smith's Bakeries The Company's frozen baked foods are marketed to traditional retail outlets, such as grocery stores, as well as non-traditional outlets, ranging from club stores and mass merchandisers to wholesalers, foodservice distributors and restaurants. Mrs. Smith's Bakeries' branded frozen baked desserts are sold primarily through grocery retailers. Its non-branded frozen baked desserts and specialty breads and rolls are sold to foodservice distributors, such as Sysco, institutions, retail in-store bakeries and restaurants, including Olive Garden and Outback Steakhouse. Its fresh baked snack products under the Mrs. Freshley's brand are sold primarily 9 13 through vending outlets. Mrs. Smith's Bakeries is in the second year of a long-term exclusive contract with a major food wholesaler to supply non-branded frozen premium pies. To fully utilize capacity in its facilities, Mrs. Smith's Bakeries produces fresh baked snack products for its own distribution under the Mrs. Freshley's brand and for Flowers Bakeries, which markets these products under its BlueBird brand. The Company, in certain circumstances, enters into co-packing arrangements with some of its competitors. Through co-packing, the Company produces and packages baked foods for popular brands such as Weight Watchers, Stouffer, Lance, Pepperidge Farm and Little Debbie. Cookies and Crackers -- Keebler Keebler sells its retail branded cookies and crackers through supermarkets, mass merchandisers, convenience stores, drug stores and club stores to over 30,000 retail customers and manufactures private label products to be sold by retailers under their own brands. In addition, Keebler supplies cookies and crackers and ice cream cones for foodservice markets and produces ice cream cones for various restaurants and ice cream retailers, such as McDonald's and TCBY. Keebler also produces a variety of custom-baked products for other marketers of branded food products, such as Kellogg, Oscar Mayer, Starkist, Kraft, Gerber and McDonald's. No single customer accounted for more than 5% of Keebler's net sales. COMPETITION Fresh Baked Foods -- Flowers Bakeries The United States fresh baked foods segment is intensely competitive and is comprised of large food companies, large independent bakeries with national distribution, and smaller regional and local bakeries. Primary national competitors include Interstate, Earthgrains, Bestfoods and Pepperidge Farm. Competition is based on product quality, brand loyalty, price effective promotions and the ability to target changing consumer preferences. Customer service, including frequent delivery and well-stocked shelves, is an increasingly important competitive factor. While the Company experiences price pressure from time to time, primarily as a result of competitors' promotional efforts, the Company believes that its status as the low cost producer and consumer brand loyalty, as well as the Company's diversity within its region in terms of geographic markets, products, and sales channels, limit the effects of such competition. Recent consolidation in the baked foods industry has reduced prior excess capacity and has further enhanced the ability of the larger firms to compete with small regional bakeries. The Company believes that it enjoys significant competitive advantages over smaller regional bakeries due to economies of scale in areas such as purchasing, production, advertising, marketing and distribution, and its lower production costs. Frozen Baked Foods -- Mrs. Smith's Bakeries According to Refrigerated and Frozen Foods, an industry trade publication, the frozen baked foods industry is led by Pillsbury, Sara Lee, and Mrs. Smith's Bakeries, which together account for approximately 46% of sales volume in the broad category. Other significant competitors in the frozen baked dessert category include Rich Products, Edwards and Pepperidge Farm. According to IRI, Mrs. Smith's Bakeries had a 53% market share, the number one position, for retail branded frozen pies in 1997. Competitors for the Mrs. Freshley's brand products produced by Mrs. Smith's Bakeries include Interstate (Hostess) and McKee (Little Debbie). Mrs. Freshley's is the country's number three fresh pastry brand sold through vending machines. Competition for branded frozen baked products depends primarily on brand recognition and loyalty, perceived product quality, effective promotions and, to a lesser extent, price. Based on consumer surveys obtained by the Company, Mrs. Smith's has an approximate 94% brand awareness in United States households. For the nonbranded products manufactured by Mrs. Smith's Bakeries, competition is based upon high-quality products requested by foodservice customers, excellent service and price. 10 14 Cookies and Crackers -- Keebler The United States branded cookie and cracker industry is led by Keebler and Nabisco, which together account for approximately 58% of total sales volume. Keebler has an approximate 24% share of the retail cookie and cracker market, while Nabisco, the largest manufacturer in the United States cookie and cracker industry, has an approximate 34% share. The remaining industry participants primarily target certain segments of the industry or focus on certain regions of the United States. Smaller competitors include numerous national, regional and local manufacturers of both branded and private label products. Competition in Keebler's markets takes many forms including establishing favorable brand recognition, developing products sought by consumers, implementing appropriate pricing, providing strong marketing support and obtaining access to retail outlets and sufficient shelf space. INTELLECTUAL PROPERTY The Company owns a number of trademarks and trade names, as well as certain patents and licenses. Flowers Bakeries' principal brand names include Flowers, Nature's Own, Whitewheat, Cobblestone Mill, Dandee, Evangeline Maid, Betsy Ross, ButterKrust, Purity, and BlueBird, among others, and its licensed trademarks include Sunbeam, Roman Meal, Country Hearth, Bunny and Holsum. Mrs. Smith's Bakeries' principal brand names are Mrs. Smith's, Mrs. Smith's Restaurant Classics, Mrs. Smith's Special Recipe, Stilwell, Oregon Farms, European Bakers, Ltd., Our Special Touch, Mrs. Freshley's, Danish Kitchen and Pour-a-Quiche. Keebler's principal trademarks and trade names include Keebler, Ernie the Keebler Elf, the Hollow Tree logo, Cheez-It, Chips Deluxe, Club, Fudge Shoppe, Graham Selects, Hi-Ho, Hydrox, Sunshine Krispy, Munch'ems, Ready Crust, Pecan Sandies, Soft Batch, Sunshine, Toasteds, Town House, Vienna Fingers, Wheatables, and Zesta. Keebler is the exclusive licensee of the Carr's crackers brand name in the United States. Such trademarks and trade names are considered to be important to the business of the Company since they have the effect of developing brand identification and maintaining consumer loyalty. Management is not aware of any fact that would negatively impact the continuing use of any of its trademarks, trade names, patents or licenses. RAW MATERIALS The Company's primary baking ingredients are flour, sugar, shortening and fruit. The Company also uses paper products, such as corrugated cardboard, aluminum products, such as pie plates, and films and plastics to package its baked foods. In addition, the Company is also dependent upon natural gas and propane as a fuel for firing ovens. On average, baking ingredients constitute approximately 10% to 15%, and packaging represents approximately 1% to 5%, of the wholesale selling price of the Company's baked foods. The Company maintains diversified sources for all of its baking ingredients and packaging products. Commodities, such as the Company's baking ingredients, periodically experience price fluctuations and, for that reason, the market for these commodities is continuously monitored. From time to time, the Company enters into forward purchase agreements and derivative financial instruments to reduce the impact of volatility in raw materials prices. REGULATION As a producer and marketer of food items, the Company's operations are subject to regulation by various federal governmental agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission (the "FTC"), the Environmental Protection Agency, and the Department of Commerce, as well as various state agencies, with respect to production processes, product quality, packaging, labeling, storage and distribution. Under various statutes and regulations, such agencies prescribe requirements and establish standards for quality, purity, and labeling. The finding of a failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines or compulsory withdrawal of products from store shelves. 11 15 In addition, advertising of the Company's businesses is subject to regulation by the FTC, and the Company is subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act. The operations of the Company, like those of similar businesses, are subject to various Federal, state, and local laws and regulations with respect to environmental matters, including air and water quality, underground fuel storage tanks, and other regulations intended to protect public health and the environment. The operations and the products of the Company's businesses also are subject to state and local regulation through such measures as licensing of plants, enforcement by state health agencies of various state standards and inspection of the facilities. The Company believes that it is currently in material compliance with applicable laws and regulations. EMPLOYEES Flowers employs approximately 7,200 persons, approximately 1,000 of whom are covered by collective bargaining agreements. Keebler employs approximately 9,700 persons, of whom approximately 5,300 are covered by collective bargaining agreements. The Company believes that it has good relations with its employees. EXECUTIVE OFFICES The address and telephone number of the principal executive offices of the Company are 1919 Flowers Circle, Thomasville, Georgia 31757, (912) 226-9110. ITEM 2. PROPERTIES Thirty-seven of the Company's production and distribution facilities are owned, two facilities are leased and three facilities are owned by local industrial development authorities under terms of Industrial Revenue Bond (IRB) financing agreements. The leased properties are leased for terms of ten to fifteen years with certain renewal options. Under the terms of the IRB financing agreements, title to these properties passes to the Company at maturity for little or no consideration. The Company's production plant locations are: Montgomery, Alabama Opelika, Alabama Tuscaloosa, Alabama Ft. Smith, Arkansas Pine Bluff, Arkansas Texarkana, Arkansas Bradenton, Florida Jacksonville, Florida Miami, Florida Atlanta, Georgia(2) Chamblee, Georgia Forest Park, Georgia Suwanee, Georgia Thomasville, Georgia Tucker, Georgia (Leased) Villa Rica, Georgia (IRB financed) London, Kentucky Baton Rouge, Louisiana Lafayette, Louisiana New Orleans, Louisiana Chaska, Minnesota (IRB financed) Goldsboro, North Carolina Jamestown, North Carolina Kinston, North Carolina Pembroke, North Carolina Stilwell, Oklahoma Pottstown, Pennsylvania (Leased) Fountain Inn, South Carolina Spartanburg, South Carolina (IRB financed) Andersonville, Tennessee Crossville, Tennessee Morristown, Tennessee El Paso, Texas Houston, Texas San Antonio, Texas Tyler, Texas Lynchburg, Virginia Norfolk, Virginia Bluefield, West Virginia Charleston, West Virginia Parkersburg, West Virginia Management considers that its properties are well maintained and sufficient for its present operations. 12 16 ITEM 3. LEGAL PROCEEDINGS The Company is engaged in various legal proceedings which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to those proceedings will not be material to the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the period ended December 13, 1997 is incorporated herein by reference. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE CASH DIVIDENDS PAID PER ---------------------------------------------------- COMMON SHARE TRANSITION ------------------------------- PERIOD 1998 FY 1997 FY 1996 ---------------- ---------------- ---------------- TRANSITION QUARTER HIGH LOW HIGH LOW HIGH LOW PERIOD 1998 FY 1997 FY 1996 - ------- ---- --- ------- ------- ------- ------- ----------- ------- ------- First.................................. 20 11/16 16 1/2 13 1/4 10 5/8 9 5/8 8 1/8 .1100 .1000 .0933 Second................................. 21 1/2 16 5/8 15 7/8 12 5/8 10 1/4 8 1/4 .1125 .1017 .0950 Third.................................. -- -- 16 1/8 13 1/4 10 8 1/4 -- .1033 .0967 Fourth................................. -- -- 18 15 12 8 1/2 -- .1075 .0983 Total......................... .2225 .4125 .3833
EQUITY SECURITY HOLDERS
NUMBER OF SHAREHOLDERS OF TITLE OF CLASS RECORD AT MARCH 23, 1998 - -------------- ------------------------- Common Stock, $.625 par value, together with Preferred Share Purchase Rights 8,027
The preceding table presents the high and low market price and cash dividend information for each fiscal quarter as it relates to the Company's common stock, $.625 par value. The Company's common stock is traded on the New York Stock Exchange (NYSE). Cash dividends have been paid on these shares every quarter since December 1971. On March 25, 1998, the last reported sale price of the Common Stock on the NYSE was $23 1/8 per share. The declaration of dividends is at the discretion of the Board of Directors of the Company. While the Company intends to continue to pay quarterly cash dividends on its Common Stock, the declaration and payment of future dividends and the amount thereof will be dependent upon the Company's financial condition, results of operations, cash requirements for its business, future prospects and other factors deemed relevant by the Board of Directors. In addition, the existing debt agreements of Keebler contain covenants which limit Keebler's ability to, among other things, pay dividends. 13 17 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated historical financial data presented below as of and for the fiscal years 1993, 1994, 1995, 1996 and 1997, and for transition period 1998, have been derived from the consolidated financial statements of Flowers which have been audited by Price Waterhouse LLP, independent accountants. The selected consolidated historical financial data for the 27 weeks ended January 4, 1997 have been derived from the unaudited financial statements of Flowers. The results of operations presented below are not necessarily indicative of results to be expected for any future period. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto incorporated by reference or included elsewhere herein.
52 WEEKS ENDED 27 WEEKS ENDED ---------------------------------------------------------- ------------------------ JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 28, JANUARY 4, JANUARY 3, 1993 1994 1995 1996 1997 1997 1998 -------- -------- ---------- ---------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Sales..................................... $962,132 $989,782 $1,129,203 $1,238,564 $1,437,713 $774,767 $784,097 Other income.............................. 4,395 4,690 10,751 12,020 46,784 41,347 2,442 Materials, supplies, labor and other production costs........................ 493,997 525,731 599,416 674,762 787,799 440,149 418,926 Selling, delivery and administrative expenses................................ 375,360 383,073 428,833 468,695 537,825 289,152 303,868 Depreciation and amortization............. 33,137 34,110 36,604 40,848 45,970 22,542 26,930 Interest.................................. 4,001 4,318 7,086 13,004 25,109 13,936 11,796 Accrual for litigation settlement......... -- -- -- 4,935 -- -- -- Income before income taxes................ 60,032 47,240 68,015 48,340 87,794 50,335 25,019 Federal and state income taxes............ 20,871 17,744 25,714 18,185 33,191 19,027 9,632 Income (loss) from investment in unconsolidated affiliate................ -- -- -- 613 7,721 (195) 18,061 Income before cumulative effect of changes in accounting principles................ 39,161 29,496 42,301 30,768 62,324 31,113 33,448 Cumulative effect of changes in accounting principles, net of tax benefit.......... -- -- -- -- -- -- (9,888) Net income................................ 39,161 29,496 42,301 30,768 62,324 31,113 23,560 EARNINGS PER COMMON SHARE -- BASIC: Income before cumulative effect of changes in accounting principles...... $ .47 $ .35 $ .49 $ .35 $ .71 $ .35 $ .38 Cumulative effect of changes in accounting principles................. -- -- -- -- -- -- (.11) Net income per common share............. .47 .35 .49 .35 .71 .35 .27 Weighted average shares outstanding..... 83,222 84,521 86,229 86,933 88,000 87,892 88,368 EARNINGS PER COMMON SHARE -- DILUTED: Income before cumulative effect of changes in accounting principles...... $ .47 $ .35 $ .49 $ .35 $ .71 $ .35 $ .38 Cumulative effect of changes in accounting principles................. -- -- -- -- -- -- (.11) Net income per common share............. .47 .35 .49 .35 .71 .35 .27 Weighted average shares outstanding 83,648 84,784 86,438 87,211 88,401 88,285 88,773 OTHER DATA: EBITDA(1)............................... 97,170 85,668 111,705 102,192 158,873 86,813 63,745 Ratio of earnings to fixed charges(2)... 6.23 5.10 6.08 3.59 3.65 3.50 2.45 Cash dividends paid per common share.... $ .327 $ .344 $ .362 $ .383 $ .413 $ .2017 $ .223
AS OF ------------------------------------------------------------------------------------ JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 28, JANUARY 3, 1993 1994 1995 1996 1997 1998 -------- -------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Total assets............................... $490,948 $559,682 $ 655,921 $ 849,443 $ 898,187 $899,381 Long-term notes payable.................... 22,307 77,422 99,251 254,355 259,884 259,249 Stockholders' equity....................... 280,154 275,731 303,981 305,324 340,012 348,567
- --------------- (1) EBITDA is defined as income before interest, taxes, depreciation and amortization, income from investment in unconsolidated affiliate and cumulative effect of changes in accounting principles. EBITDA is presented because the Company believes it to be a useful indicator of a company's ability to meet debt service and capital expenditure requirements. It is not, however, intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). (2) For purposes of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations before income taxes and income from investment in unconsolidated affiliate plus fixed charges. Fixed charges consist of interest expense and interest portion of rent expense. 14 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Selected Financial Data" included herein and the consolidated financial statements and the related notes thereto of the Company incorporated by reference or included herein. The following information contains forward-looking statements which involve certain risks and uncertainties. See "Forward-Looking Statements." OVERVIEW General The Company produces and markets fresh baked breads, rolls and snack foods, frozen baked breads, desserts and snack foods, and cookies and crackers. Sales are principally affected by pricing, quality, brand recognition, new product introductions and product line extensions, marketing and service. The Company manages these factors to achieve a sales mix favoring its higher margin branded products while using high volume products to control costs and maximize use of capacity. The principal elements comprising the Company's production costs are ingredients, packaging materials, labor and overhead. The major ingredients used in the production of the Company's products are flour, sugar, shortening and fruit. The Company also uses paper products, such as corrugated cardboard, aluminum products, such as pie plates, and plastic to package its products. The prices of these materials are subject to significant volatility. The Company has mitigated the effects of such price volatility in the past through its hedging programs, but may not be successful in protecting itself from fluctuations in the future. In addition to the foregoing factors, production costs are affected by the efficiency of production methods and capacity utilization. The Company's selling, delivery and administrative expenses are comprised mainly of distribution, logistics and advertising expenses. Distribution and logistics costs represent the largest component of the Company's cost structure, other than production costs, and are principally influenced by changes in sales volume. Depreciation and amortization expenses for the Company is comprised of depreciation of property, plant and equipment and amortization of costs in excess of net tangible assets associated with acquisitions. The Company's interest expenses are primarily associated with the Company's Revolving Credit Facility, senior notes outstanding in the aggregate principal amount of $125 million and the Company's commercial paper program. See "-- Liquidity and Capital Resources." Matters Affecting Analysis The Keebler Acquisition closed on February 3, 1998. Accordingly, the results of operations of Flowers are not consolidated with those of Keebler for the transition period 1998 or for any prior fiscal year. From January 26, 1996, the date of the Company's initial investment in Keebler, through February 3, 1998, the Company accounted for its investment in Keebler using the equity method of accounting. For reporting periods ending after February 3, 1998, the Company will consolidate Keebler for financial reporting purposes. As a result of the Company's change in fiscal year end, the Company's quarterly reporting periods for fiscal year 1998 shall be as follows: first quarter ending April 25, 1998, second quarter ending July 18, 1998, third quarter ending October 10, 1998, and fourth quarter and fiscal year ending January 2, 1999 (the Saturday nearest December 31). 15 19 The Company's results of operations, expressed as a percentage of sales, for the 27 week transition period ended January 3, 1998, the corresponding 27 week period ended January 4, 1997, and for the 52 week periods ended June 28, 1997, June 29, 1996 and July 1, 1995 are set forth below:
52 WEEKS ENDED 27 WEEKS ENDED ----------------------------- ----------------------- JULY 1, JUNE 29, JUNE 28, JANUARY 4, JANUARY 3, 1995 1996 1997 1997 1998 ------- -------- -------- ---------- ---------- Sales..................................... 100.00% 100.00% 100.00% 100.00% 100.00% Other income.............................. .95 .97 3.26 5.34 .31 ------ ------ ------ ------ ------ 100.95 100.97 103.26 105.34 100.31 ------ ------ ------ ------ ------ Materials, supplies, labor and other production costs........................ 53.08 54.48 54.80 56.81 53.43 Selling, delivery and administrative expenses................................ 37.98 38.24 37.41 37.32 38.75 Depreciation and amortization............. 3.24 3.30 3.20 2.91 3.43 Interest.................................. .63 1.05 1.75 1.80 1.50 ------ ------ ------ ------ ------ Income before income taxes................ 6.02 3.90 6.10 6.50 3.20 Federal and state income taxes............ 2.28 1.47 2.31 2.46 1.23 Income (loss) from investment in unconsolidated affiliate................ -- .05 .54 (.03) 2.30 Income before cumulative effect of changes in accounting principles................ 3.74 2.48 4.33 4.01 4.27 Cumulative effect of changes in accounting principles, net of tax benefit.......... -- -- -- -- (1.26) ------ ------ ------ ------ ------ Net income................................ 3.74% 2.48% 4.33% 4.01% 3.01% ====== ====== ====== ====== ======
TWENTY-SEVEN WEEKS ENDED JANUARY 3, 1998 COMPARED TO TWENTY-SEVEN WEEKS ENDED JANUARY 4, 1997 Sales. For the 27 weeks ended January 3, 1998, sales were $784.1 million, or 1% higher than sales for the comparable period in the prior year, which were $774.8 million. Sales from businesses acquired in 1997 contributed most of the increase, and were offset somewhat by lost sales attributable to businesses divested by Flowers Bakeries in 1997. The Company's sales for the current period also were favorably impacted by a change in promotional practices at Mrs. Smith's Bakeries implemented in 1997. Other Income. For the 27 weeks ended January 4, 1997, the Company recognized approximately $43 million in income attributable to the gain on the sale of the Company's distributor notes receivable, which occurred in September 1996. The sale of these notes was necessitated by the Company's decision to settle claims by the United States Internal Revenue Service ("IRS") that the notes constituted current rather than deferred income. Other income for the period was offset by approximately $5 million attributable to the write-down of certain idle facilities. Materials, Supplies, Labor and Other Production Costs. The Company's production costs for the 27 weeks ended January 3, 1998, were $418.9 million, or 5% lower than its costs of $440.1 million for the prior year's period. The improvement is attributable to decreased ingredient costs, primarily flour, and continued emphasis on cost controls and operating efficiencies. Selling, Delivery and Administrative Expenses. Selling, delivery and administrative expenses were $303.9 million, or 5% higher for the 27 weeks ended January 3, 1998, compared to $289.2 million for the same period in the prior year. For the 27 weeks ended January 3, 1998, the Company experienced higher advertising and promotional expenses to support new product introductions, primarily for Mrs. Smith's Bakeries, than in the prior year, as well as increased logistics expenses at Mrs. Smith's Bakeries to service increased sales volume. In addition, the Company accrued administrative and other expenses associated with the change in its fiscal year. Depreciation and Amortization. Depreciation and amortization expense was $26.9 million, or 20% higher for the 27 weeks ended January 3, 1998, than for the comparable period in the prior year, which was 16 20 $22.5 million. The increase was due primarily to the effect of depreciation attributable to capital improvements implemented in 1997. Interest. Interest expense for the 27 weeks ended January 3, 1998 was $11.8 million, or 15% lower than interest expense of $13.9 million for the same period in 1997, due primarily to interest of $2.5 million paid pursuant to the IRS settlement discussed above during the 27 weeks ended January 4, 1997. Income Before Income Taxes. Income before income taxes for the 27 weeks ended January 3, 1998 was $25.0 million. The decrease from the prior year's corresponding period is primarily attributable to the one-time gain in the prior period that was generated by the sale of the Company's distributor notes receivable, discussed above. Federal and State Income Taxes. Income taxes for the 27 weeks ended January 3, 1998 were $9.6 million, a decrease from the corresponding period in the prior year, due primarily to the difference in pre-tax income for such periods. Net Income from Keebler Investment. In the 27 weeks ended January 3, 1998, the Company recorded net income from its investment in Keebler of $18.1 million, compared to a net loss of $.2 million for the comparable period for the prior year. The increase in net income from Keebler is primarily attributable to sales volume increases associated with certain of Keebler's branded cookie and cracker products, the inclusion of the business of Sunshine following its acquisition in June 1996 by Keebler, improved gross margins and a more efficient fixed cost structure at Keebler. Net Income. Net income of $23.6 million for the 27 weeks ended January 3, 1998 was 24% lower than the $31.1 million net income for the comparable prior year's period. In addition to the factors described above, the difference in net earnings was primarily attributable to the effect of one-time charges of $9.9 million for the cumulative effect (net of tax benefit) of changes in accounting principles taken in the more recent period, expenses accrued by the Company for administrative and other costs associated with the change in its fiscal year, as compared to the impact in 1996 of the Company's recognition of the gain on the sale of its distributor notes receivable. FISCAL YEAR ENDED JUNE 28, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 29, 1996 Sales. Sales for fiscal year 1997 were $1.438 billion, or 16% higher than sales of $1.239 billion for fiscal year 1996. The increase in sales was primarily attributable to sales from businesses acquired during the fourth quarter of fiscal year 1996 and in fiscal year 1997. The Company also experienced increased sales volume in the Company's existing businesses, primarily in Mrs. Smith's Bakeries. Other Income. In fiscal year 1997, the Company recognized a gain of approximately $43.2 million on the sale of the Company's distributor notes, as discussed above. Materials, Supplies, Labor and Other Production Costs. The Company's production costs for fiscal year 1997 were $787.8 million, or 17% higher than costs of $674.8 million for fiscal year 1996. The increase in such costs was due primarily to increased sales volume, and was offset by decreased ingredient and packaging costs during the fourth quarter of fiscal 1997. Selling, Delivery and Administrative Expenses. Selling, delivery and administrative expenses increased by 15% to $537.8 million for fiscal year 1997 from $468.7 million for fiscal year 1996. The increase was due primarily to increased sales volume and increased advertising and promotional expenditures, particularly for Mrs. Smith's Bakeries. Selling, delivery and administrative expenses as a percentage of sales remained relatively constant with the prior fiscal year as a result of increased volume and a more efficient cost structure, particularly in selling and distribution at Flowers Bakeries. Depreciation and Amortization. Depreciation and amortization expense increased by 13% to $46.0 million for fiscal year 1997 from $40.8 million for fiscal year 1996, due primarily to increased capital spending and the amortization of the Mrs. Smith's trademarks and costs in excess of net tangible assets. Interest. Interest expense for fiscal year 1997 increased by 93% to $25.1 million from $13.0 million for fiscal year 1996. The increase was attributable to higher overall borrowings to partially fund fiscal year 1997 capital spending, to finance frozen inventory at Mrs. Smith's Bakeries, and to finance the Company's initial 17 21 investment in Keebler. Interest expense for fiscal year 1997 also reflects the payment of $2.5 million on the IRS settlement as described above and a higher average interest rate as compared to the prior year. Income Before Income Taxes. Fiscal year 1997 income before income taxes increased by 82% to $87.8 million from $48.3 million for fiscal year 1996, due primarily to the gain on the sale of the Company's distributor notes receivable. Federal and State Income Taxes. Federal and state income taxes for fiscal year 1997 increased to $33.2 million from $18.2 million for fiscal year 1996 due to increased pre-tax income for fiscal year 1997. The effective income tax rate for the Company was 37.8% in fiscal year 1997 and 37.6% for fiscal year 1996. Net Income from Keebler Investment. For fiscal year 1997, the Company reported net income from its investment in Keebler of $7.7 million, as compared to $.6 million for fiscal 1996. The increase was due primarily to the Company's investment in Keebler extending over the full fiscal year 1997, as opposed to fiscal year 1996, when the Company made its initial investment in Keebler in the third fiscal quarter. In addition, Keebler's net income for the time period covered in the Company's fiscal year 1997 increased substantially due to volume increases, the inclusion of the Sunshine business and improved cost controls at Keebler. Net Income. For fiscal year 1997, the Company's net income increased by 102% to $62.3 million from $30.8 million for fiscal year 1996. The increase in net income was due primarily to the inclusion of the Company's after-tax income from its investment in Keebler, as well as the gain on the sale of the distributor notes receivable and the other factors described above. FISCAL YEAR ENDED JUNE 29, 1996 COMPARED TO FISCAL YEAR ENDED JULY 1, 1995 Sales. Sales for fiscal year 1996 were $1.239 billion, or 10% higher than sales of $1.129 billion for fiscal year 1996. Approximately one-half of the increase in sales was attributable to sales from businesses acquired during fiscal year 1995 and early in fiscal year 1996. The Company also experienced increased sales volume in the Company's existing businesses, as well as increased selling prices and the addition of 160 new DSD routes at Flowers Bakeries. Other Income. The Company experienced a decrease of 26% in other income for fiscal year 1996 compared to fiscal year 1995, due to a gain of approximately $12 million on the sale of certain fixed assets in fiscal year 1995. Materials, Supplies, Labor and Other Production Costs. The Company's production costs for fiscal year 1996 were $674.8 million, or 13% higher than costs of $599.4 million for fiscal year 1995. The increase in such costs was due primarily to increased ingredient costs, particularly flour, which was at a 21 year high during the year. Selling, Delivery and Administrative Expenses. Selling, delivery and administrative expenses increased by 9% to $468.7 million for fiscal year 1996 from $428.8 million for fiscal year 1995. The increase was due primarily to increased sales volume, as well as start-up costs associated with the addition of 160 new DSD routes at Flowers Bakeries. Additionally, winter weather in the eastern United States negatively impacted sales and distribution costs. Depreciation and Amortization. Depreciation and amortization expense increased by 12% to $40.8 million for fiscal year 1996 from $36.6 million for fiscal year 1995, due primarily to increased capital spending. Interest. Interest expense for fiscal year 1996 increased by 84% to $13.0 million from $7.1 million for fiscal year 1995. The increase was attributable to higher overall borrowings to finance the Company's initial investment in Keebler. Income Before Income Taxes. Fiscal year 1996 income before income taxes decreased by 29% to $48.3 million from $68.0 million for fiscal year 1995, due primarily to the factors described above, as well as the impact of a reserve of $4.9 million recorded to reflect the estimated costs of a final settlement of litigation involving subsidiary operations in Texas. Income was favorably impacted by the recognition of a gain of $4.1 18 22 million on the sale of Keebler stock to certain former shareholders of Sunshine in connection with Keebler's acquisition of Sunshine. Federal and State Income Taxes. Federal and state income taxes for fiscal year 1996 decreased to $18.2 million from $25.7 million for fiscal year 1995 due to decreased pre-tax income for fiscal year 1996. The effective income tax rate for the Company was 37.6% in fiscal year 1996 and 37.8% for fiscal year 1995. Net Income from Keebler Investment. For fiscal year 1996, the Company reported net income from its investment in Keebler of $.6 million. The Company made its initial investment in Keebler in fiscal year 1996. Net Income. For fiscal year 1996, the Company's net income decreased by 27% to $30.8 million from $42.3 million for fiscal year 1995 due to the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of cash to fund its liquidity needs is net cash provided by operating activities and availability under its revolving credit facility. During the transition period 1998, the Company's working capital decreased $8.8 million to $20.3 million, with cash and cash equivalents decreasing to $3.9 million from $31.1 million at the end of fiscal year 1997. The working capital decrease and the decrease in cash and cash equivalents in the 27 weeks ended January 3, 1998 were primarily due to cash expended for capital improvements throughout the Company. Cash and cash equivalents increased during fiscal year 1997 from $25.0 million to $31.1 million, and working capital decreased during that fiscal year from $48.5 million to $29.1 million. The decrease in working capital is primarily due to the recording of purchase accounting reserves of $35.5 million relating to acquisitions consummated during fiscal years 1996 and 1997. Cash flows from operating activities increased in fiscal year 1997 to $79.5 million from $59.4 million. This increase was the net result of increased profits and decreased working capital. During fiscal year 1997 and the 27 weeks ended January 3, 1998, the Company spent approximately $78 million and $33 million, respectively, for capital expenditures to expand production facilities and increase efficiencies in both production and distribution. Since 1992, expenditures have totaled approximately $377 million with an additional $41 million of expenditures attributable to acquisitions during that period. Capital expenditures for fiscal year 1998 are expected to be approximately $40 million for Flowers Bakeries and Mrs. Smith's Bakeries combined and to be approximately $50 million for Keebler. These expenditures are targeted to further improve the efficiency of the Company's production and distribution capabilities. At January 3, 1998, the Company had borrowed a total of $122 million under a five year $300 million syndicated loan facility. On January 30, 1998, the Company entered into a revolving credit facility, which, among other changes, amended the loan facility to increase available funds to $500 million (the "Revolving Credit Facility"). In connection with the Keebler Acquisition, the Company borrowed an additional $309 million and the Company separately repaid $10 million, so that amounts outstanding under the Revolving Credit Facility as of March 26, 1998 aggregated $422 million. Also currently outstanding are $125 million of long-term senior notes issued through a private placement completed during fiscal year 1996. The Company has in place a $75 million commercial paper program to finance inventory. Borrowings outstanding under this program at January 3, 1998 were $53.5 million. The Company also has a $50 million ten-year master lease agreement to finance the automated production lines at certain of its facilities. At January 3, 1998, $38.7 million had been used under this agreement. Certain of the Company's credit facilities contain covenants and restrictions on actions by the Company and its subsidiaries, other than Keebler, requirements that the Company comply with a minimum cash flow test, a maximum leverage ratio, a fixed charges coverage ratio and a minimum consolidated net worth test. As of January 3, 1998, the Company was in compliance with respect to all covenants under its credit facilities. Cash dividends have grown at a compound annual rate of 6% since 1992, increasing from an annual payout of $.309 in calendar 1992 to $.433 in calendar 1997. 19 23 The Company owns a majority of the outstanding stock of Keebler and, commencing with all reporting periods ending subsequent to February 3, 1998, the Company will consolidate Keebler for financial reporting purposes. The Company is limited in its ability to access the cash flows of Keebler to support the Company's other operations due to the fact that Keebler is not wholly-owned by the Company and due to restrictions on the payment of dividends in Keebler's existing credit facilities. The Company believes that cash flow from operations, and funds available under the Company's existing credit facilities, will be sufficient to fund its operating expenses, working capital, capital expenditures and debt service requirements through fiscal year 1998. The Company from time to time reviews and will continue to review acquisition and joint venture opportunities as well as changes in the capital markets. If the Company were to consummate a significant acquisition or elect to take advantage of favorable opportunities in the capital markets, the Company may supplement availability or revise the terms under its credit facilities or complete public or private offerings of equity or debt securities. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for the Company's fiscal year 1998. This new statement revises standards for public companies to report information about segments of their business and also requires disclosure of selected segment information in quarterly financial reports. The statement also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has not yet determined the impact this new statement may have on disclosures in the consolidated financial statements. The FASB also issued certain other disclosure-related accounting pronouncements during 1997. While these new statements are effective for future reporting periods, the Company does not anticipate they will have any significant impact on the consolidated financial statements. SEASONALITY The Company's sales, net income and cash flows are affected by the timing of new product introductions, promotional activities, price increases, and a seasonal sales bias toward the second half of the calendar year due to events such as back-to-school, and the Thanksgiving and Christmas holidays. Sales for Mrs. Smith's Bakeries are highly seasonal since, historically, pie sales have been concentrated in the year-end holiday season. In January 1998, the Company commenced a program entitled Operation 365 to promote increased pie consumption during the remainder of the year. YEAR 2000 CONVERSION Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists concerning the potential effects associated with such compliance. The Company is currently analyzing the Year 2000 computer systems issue and has completed the conversion of certain of its computerized operations. There can be no assurance that the Company's software contains or will contain all necessary date code changes. The Company, its customers and its suppliers may be affected by Year 2000 issues. The Company has plans to communicate with significant customers, vendors and other third parties with whom it does significant business to determine their Year 2000 compliance readiness. However, there can be no guarantee that the systems of other entities will be timely converted, or that their failure to convert, or a conversion that is incompatible with the Company's system, will not have an adverse effect on the Company's business, financial condition and results of operations. 20 24 On November 20, 1997, the Emerging Issues Task Force ("EITF"), a subcommittee of FASB, issued EITF 97-13, which requires the cost of business process reengineering activities that are part of an information systems development project, including Year 2000 compliance, be expensed as those costs are incurred. Any unamortized costs that were previously capitalized are required to be written off as a cumulative adjustment in the quarter that included November 20, 1997. During the twenty-seven week period ended January 3, 1998, the Company recorded a cumulative after-tax charge of $8.8 million, or $.10 per share, as a result of its adoption of this pronouncement. These costs were attributable to a state-of-the-art management information system, which is being implemented at Mrs. Smith's Bakeries. FORWARD-LOOKING STATEMENTS Certain statements incorporated by reference or made herein under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere herein are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and are subject to the safe harbor provisions of that Act. Such forward-looking statements include, without limitation, the future availability and prices of raw materials, the availability of capital on acceptable terms, the competitive conditions in the baked foods industry, potential regulatory obligations, the Company's strategies and other statements contained herein that are not historical facts. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, changes in general economic and business conditions (including in the baked foods markets), the Company's ability to recover its raw material costs in the pricing of its products, the availability of capital on acceptable terms, actions of competitors, the extent to which the Company is able to develop new products and markets for its products, the time required for such development, the level of demand for such products, changes in the Company's business strategies and other factors discussed herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the Index to Financial Statements and Financial Statement Schedules for the required information. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 21 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following individuals are the Directors and Executive Officers of the Company:
NAME POSITION - ---- -------- Amos R. McMullian.................................... Chairman of the Board and Chief Executive Officer Robert P. Crozer..................................... Vice Chairman of the Board C. Martin Wood III................................... Senior Vice President, Chief Financial Officer and Director G. Anthony Campbell.................................. Secretary, General Counsel and Director Edward L. Baker...................................... Director Joe E. Beverly....................................... Director Franklin L. Burke.................................... Director Langdon S. Flowers................................... Director Joseph L. Lanier, Jr................................. Director J.V. Shields, Jr..................................... Director Heeth Varnedoe III................................... Director George E. Deese...................................... President and Chief Operating Officer, Flowers Bakeries, Inc. Gary L. Harrison..................................... President and Chief Operating Officer, Mrs. Smith's Bakeries, Inc. Jimmy M. Woodward.................................... Treasurer and Chief Accounting Officer Marta Jones Turner................................... Vice President of Public Affairs
Amos R. McMullian, age 60, has served as Chairman of the Board of Directors of the Company since January 1985, Chairman of the Executive Committee since January 1984, and Chief Executive Officer of the Company since April 1981. He served as Vice Chairman of the Board of Directors of the Company from 1984 to 1985 and Co-Chairman of the Executive Committee from 1983 to 1984. Mr. McMullian served as President and Chief Operating Officer of the Company from 1976 to 1984. Mr. McMullian has been a Director of the Company since 1975. He joined the Company's predecessor corporation in 1963. Mr. McMullian has served as a director of Keebler since January 1996. Robert P. Crozer, age 51, has served as Vice Chairman of the Board of Directors of the Company since 1989. Mr. Crozer served as Vice President -- Marketing from 1985 to 1989, as President and Chief Operating Officer, Convenience Products Group from 1979 to 1989 and as Corporate Director of Marketing Planning from 1979 to 1985. Mr. Crozer has been a Director of the Company since 1979. He joined the Company in 1973. Mr. Crozer has served as a director of Keebler since January 1996 and has served as Chairman of the Board of Directors of Keebler since February 1998. C. Martin Wood III, age 54, has served as Senior Vice President and Chief Financial Officer of the Company since September 1978. Mr. Wood served as Vice President -- Finance of the Company from 1976 to 1978. Mr. Wood has been a Director of the Company since 1975. He joined the Company in 1970. Mr. Wood has served as a director of Keebler since January 1996. G. Anthony Campbell, age 45, has served as Secretary and General Counsel of the Company since January 1985. Mr. Campbell served as Assistant General Counsel of the Company from 1983 to 1985. Mr. Campbell has been a Director of the Company since 1991. He joined the Company in 1983. Mr. Campbell has served as a director of Keebler since February 1998. Edward L. Baker, age 62, is Chairman of the Board of Florida Rock Industries, Inc. (AMEX), a construction materials company based in Jacksonville, Florida, which produces and markets sand, gravel, crushed stone, concrete blocks and other building materials throughout the Southeast. He is also a Director of American Heritage Life Insurance Company, the principal subsidiary of American Heritage Life Investment 22 26 Corporation (NYSE), Regency Realty Corporation (NYSE), and FRP Properties (OTC). He has been a Director of the Company since 1992. Joe E. Beverly, age 56, is Chairman of the Board of Commercial Bank in Thomasville, Georgia, a wholly-owned subsidiary of Synovus Financial Corp. (NYSE) and is the former Vice Chairman of the Board of Synovus Financial Corp. He was President and a Director of Commercial Bank from 1973 to 1989. Mr. Beverly has been a Director of the Company since 1996. Franklin L. Burke, age 56, a private investor since 1991, is the former Senior Executive Vice President and Chief Operating Officer of Bank South Corp. (OTC), Atlanta, Georgia, and the former Chairman and Chief Executive Officer of Bank South, N.A., the principal subsidiary of Bank South Corp. From June 1993 through February 1994, Mr. Burke was employed as an advisor by the J. B. Fuqua Foundation, Inc. He has been a Director of the Company since 1994. Mr. Burke has served as a director of Keebler since February 1998. Langdon S. Flowers, age 75, retired as Chairman of the Board of Directors of the Company in 1985. He has been a Director of the Company since 1968. Mr. Flowers also is a Director of American Heritage Life Insurance Company, the principal subsidiary of American Heritage Life Investment Corporation (NYSE). Joseph L. Lanier, Jr., age 66, has been Chairman of the Board of Directors and Chief Executive Officer of Dan River Inc. (NYSE), Danville, Virginia, a textile company, since 1989. He is also a Director of Dimon, Inc. (NYSE), SunTrust Banks, Inc. (NYSE), Torchmark Corp. (NYSE) and Waddell & Reed Financial, Inc. (NYSE). Mr. Lanier has been a Director of the Company since 1977. J.V. Shields, Jr., age 59, is Managing Director and Chairman of the Board of Directors of Shields & Company, New York, New York, a diversified financial services company and member of the New York Stock Exchange, Inc. Mr. Shields also is the Chairman of the Board of Capital Management Associates, Inc., a registered investment advisor, and the Chairman of the Board of Trustees of The 59 Wall Street Trust, the Brown Brothers Harriman mutual funds group. He has been a Director of the Company since 1989. Heeth Varnedoe III, age 60, who joined the Company's predecessor corporation in 1960, retired from the office of President and Chief Operating Officer on June 28, 1997. Mr. Varnedoe is currently employed as a consultant by the Company and serves on the Company's Board of Directors, to which he was first elected in 1980. Mr. Varnedoe also is a Director of Integrity Music, Inc. (OTC). George E. Deese, age 51, has served as President and Chief Operating Officer of Flowers Bakeries, Inc. since January 1997. Prior to that time, Mr. Deese served as President and Chief Operating Officer of the Baked Products Group of the Company from 1983 to January 1997. He served as Regional Vice President of the Baked Products Group from 1981 to 1983. Mr. Deese was President of Atlanta Baking Company from 1980 to 1981. He joined the Company in 1964. Gary L. Harrison, age 60, has served as President and Chief Operating Officer of Mrs. Smith's Bakeries, Inc., since January 1997. Prior to that time, Mr. Harrison served as President and Chief Operating Officer of the Specialty Foods Group of the Company from 1989 to January 1997, served as Executive Vice President of the Baked Products Group from 1987 to 1989, served as Regional Vice President of the Baked Products Group from 1977 to 1987, and served as President of Flowers Baking Company of Thomasville from 1976 to 1977. He joined the Company in 1954. Jimmy M. Woodward, age 37, has served as Treasurer and Chief Accounting Officer of the Company since October 1997. Mr. Woodward served as Assistant Treasurer of the Company for more than five years prior to that time. Mr. Woodward has served as a director of Keebler since February 1998. Marta Jones Turner, age 44, has served as Vice President of Public Affairs of the Company since September 1997. She served as the Director of Public Affairs of the Company for more than five years prior to that time. Heeth Varnedoe III is a nephew of Langdon S. Flowers. Robert P. Crozer, J.V. Shields, Jr. and C. Martin Wood III are brothers-in-law, and their spouses are nieces of Langdon S. Flowers. 23 27 COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has established certain standing committees, which include the Audit, Nominating, and Compensation Committees. The Board of Directors met three times during the twenty-seven week transition period ended January 3, 1998. Its Audit Committee met once, and its Nominating Committee and Compensation Committee did not meet. Each incumbent Director attended at least 75 percent of the aggregate number of meetings of the Board of Directors and all committees on which he served during his respective period of service. The members of the Audit Committee are Edward L. Baker, Chairman, Joe E. Beverly and Franklin L. Burke; and the functions of the Audit Committee are: (a) recommending to the Board of Directors and shareholders the engagement or discharge of independent auditors; (b) reviewing investigations into matters relating to audit functions; (c) reviewing with independent auditors the plan for and results of the audit engagement; (d) reviewing the scope and results of internal auditing procedures; (e) reviewing the independence of the auditors; (f) considering the range of audit and non-audit fees; (g) reviewing the adequacy of the Company's system of internal accounting controls; and (h) reviewing related party transactions. The members of the Nominating Committee are Robert P. Crozer, Chairman, Edward L. Baker, Joseph L. Lanier, Jr. and Amos R. McMullian; and the functions of the Nominating Committee are: (a) selecting, or recommending to the Board of Directors nominees for election as Directors; and (b) considering the performance of incumbent Directors in determining whether to nominate them for reelection. The Nominating Committee will consider nominations for the next annual meeting which are submitted by shareholders in writing to the Committee at the Company's principal office by May 15, 1998. The members of the Compensation Committee are Joseph L. Lanier, Jr., Chairman, Edward L. Baker and Franklin L. Burke. The functions of the Compensation Committee are: (a) approving, or recommending to the Board of Directors approval of, compensation plans for officers and Directors; (b) approving, or recommending to the Board of Directors approval of, remuneration arrangements for Directors and senior management; and (c) granting benefits under compensation plans. DIRECTORS' FEES Each nonemployee member of the Board of Directors receives payments pursuant to a standard arrangement. For the twenty-seven week transition period ended January 3, 1998, such Directors received: (i) $1,000 for each meeting of the Board or committee of the Board attended, with each chairman of a Board committee receiving an additional $200 per committee meeting; (ii) reimbursement for travel expenses; and (iii) $1,800 per month. In lieu of the $1,800 per month, nonemployee members of the Board of Directors may elect under the Nonemployee Directors' Equity Plan to invest all or a portion of the $1,800 per month in options to purchase the Company's common stock. The value of such options is determined by the Black-Scholes option pricing model. During the transition period 1998 certain nonemployee directors elected to receive said options under the plan. During the twenty-seven week transition period ended January 3, 1998, W. H. Flowers, Chairman Emeritus of the Board of Directors of the Company, and L. S. Flowers, a Director of the Company and a retired Chairman of the Board, received payments totaling $93,426 and $30,901, respectively, for consulting services provided to the Company pursuant to written contracts between the Company and each individual. The contracts provide that during their term each of Messrs. Flowers will not compete, directly or indirectly, with the Company. Heeth Varnedoe III, who retired as President and Chief Operating Officer on June 28, 1997, is currently employed as a consultant with the Company pursuant to a consulting agreement dated the date of his retirement. Pursuant to that agreement, Mr. Varnedoe will be paid compensation at the annual rate of $389,235 through February 7, 1998, and $194,618 through February 10, 1999. The consulting agreement also provides for Mr. Varnedoe's continued participation in the Company's employee benefit plans through 24 28 February 10, 1999. The agreement provides that, thereafter, in consideration of a payment of $45,000 per year, Mr. Varnedoe will not compete, directly, or indirectly, with the Company. ITEM 11. EXECUTIVE COMPENSATION The following table provides summary information concerning compensation of the Company's Chief Executive Officer and each of the four other most highly compensated Executive Officers of the Company for the periods indicated. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ---------------------------------- ----------------------------------------------- RESTRICTED LONG TERM ALL OTHER STOCK OPTION INCENTIVE OTHER NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS AWARDS PAYOUTS COMPENSATION PRINCIPAL POSITION YEAR $ $ $ $ # $ $ - ------------------ ------ -------- -------- ------------ ---------- ------- --------- ------------ Amos R. McMullian............ 1998(1) 313,096 187,858 0 498,593 0 0 0 Chairman of the Board and 1997 505,680 505,680 0 0 0 0 0 Chief Executive Officer 1996 481,600 0 0 410,737 225,000 0 0 1995 436,800 299,295 0 0 0 0 0 Robert P. Crozer............. 1998(1) 211,327 105,663 0 190,698 0 0 0 Vice Chairman of the Board 1997 389,235 311,388 0 0 0 0 0 1996 370,700 0 0 277,239 135,000 0 0 1995 324,480 177,867 0 0 0 0 0 George E. Deese.............. 1998(1) 162,623 73,180 0 131,215 0 0 0 President and Chief 1997 268,695 188,087 0 0 0 0 0 Operating Officer 1996 255,900 0 0 187,297 90,000 0 0 Flowers Bakeries, Inc. 1995 235,900 113,147 0 0 0 0 0 Gary L. Harrison............. 1998(1) 162,623 73,180 0 131,215 0 0 0 President and Chief 1997 268,695 263,087 0 0 0 0 0 Operating Officer 1996 255,900 0 0 187,297 90,000 0 0 Mrs. Smith's Bakeries, Inc. 1995 235,900 188,147 0 0 0 0 0 C. Martin Wood III........... 1998(1) 125,135 50,054 0 85,024 0 0 0 Senior Vice President and 1997 210,000 147,000 0 0 0 0 0 Chief Financial Officer 1996 200,000 0 0 164,281 56,250 0 0 1995 187,715 90,036 0 0 0 0 0
- --------------- (1) Represents the twenty-seven week transition period ended January 3, 1998. The individuals set forth in the table above held the following Equity Incentive Award and June 1997 Restricted Stock Award shares granted under the 1989 Executive Stock Incentive Plan, subject to the restrictions of each grant, and valued at the January 2, 1998 closing market price ($20.4375), less the price required to be paid by the individual at the time the restrictions lapse: Messrs. McMullian 110,554 shares, $1,487,102; Crozer 76,034 shares, $1,086,081; Wood 41,857 shares, $606,193; Deese 51,639 shares, $736,911; Harrison 51,639 shares, $736,911. The shares earn the common stock dividend. 25 29 The following table provides information on option exercises during the twenty-seven week transition period ended January 3, 1998, by the named executive officer and the value, at the January 2, 1998 closing price ($20.4375), of unexercised options. AGGREGATE OPTION EXERCISES IN THE TRANSITION PERIOD AND PERIOD END OPTION VALUES
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT PERIOD END PERIOD END ------------- --------------- SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE - ---- --------------- -------- ------------- --------------- Amos R. McMullian.................. 0 $0 225,000/NONE $2,699,438/NONE Robert P. Crozer................... 0 0 269,294/NONE $3,600,479/NONE George E. Deese.................... 0 0 90,000/NONE $1,079,775/NONE Gary L. Harrison................... 0 0 145,544/NONE $1,884,264/NONE C. Martin Wood III................. 0 0 56,250/NONE $ 674,859/NONE
SEVERANCE POLICY The Company's Severance Policy (the "Policy") would pay one year's compensation to any employee who is actually or constructively terminated, other than for good cause, following a Change in Control, as defined in the Company's ESIP. The Policy reduces the amount payable to any individual who would be subject to the "golden parachute" excise tax imposed by the Internal Revenue Code of 1986, as amended, if, and only to the extent that, the net amount after taxes received by the individual would be greater than if there had been no reduction. SEPARATION AGREEMENTS The Company has authorized separation agreements with all executive officers and certain other key employees. These agreements serve as memoranda of the Change in Control provisions which have been authorized by the Company in its compensation plans, and provide additional benefits, including relocation benefits and certain welfare benefits in the event of termination of employment following a Change in Control, except that these benefits are to be reduced to the extent benefits are received under the Severance Policy described above. The Compensation Committee may select, in its sole discretion, any additional executives to be offered such separation agreements. RETIREMENT PLAN The Flowers Industries, Inc. Retirement Plan No. 1 (the "Retirement Plan") provides a pension upon retirement on or after age 65 to employees of the Company and its adopting subsidiaries. The pension is the sum of annual credits earned during employment. Currently, each annual credit is 1.35 percent of the first $10,000 of W-2 earnings, subject to certain exclusions, for each year of service and 2 percent of W-2 earnings, subject to certain exclusions, in excess of $10,000 each year for each year of service. The table below includes the estimated amounts which would be payable to the persons indicated upon their retirement at age 65 under the provisions of the Retirement Plan as supplemented by the Company's Supplemental Executive Retirement Plan described immediately below and assuming that payment is made in the form of a 50% joint and survivor annuity. 26 30 DISCLOSURE FOR CERTAIN INDIVIDUALS
CREDITED PROJECTED YEARS ANNUAL OF SERVICE BENEFIT ---------- --------- Amos R. McMullian........................................... 34 $284,883 Robert P. Crozer............................................ 24 $242,924 George E. Deese............................................. 33 $162,252 Gary L. Harrison............................................ 41 $124,428 C. Martin Wood III.......................................... 27 $135,185
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company's 1990 Supplemental Executive Retirement Plan provides a supplemental retirement income benefit for any executive who is a participant in the Retirement Plan, if his Retirement Plan benefit is subject to certain restrictions which apply to tax-qualified plans. The supplemental benefit is equal to the excess of (i) the benefit he would have received according to the Retirement Plan formula had he not been subject to limitations on maximum benefits or pensionable compensation which may be provided by tax-qualified plans over (ii) the amount he will receive from the Retirement Plan as so limited. The 1990 Supplemental Executive Retirement Plan is not tax-qualified. The purpose of the Plan is to ensure that each participating executive's total retirement income benefits will equal the amounts that would have been payable to him under the Retirement Plan absent said limitations. Payments pursuant to this Plan will be calculated in the form of a life only annuity, and the actuarial equivalent thereof will be paid in the form which the participating executive has elected for purposes of the Retirement Plan. Payments will be made from the Company's general assets. Payments will be made at the same time as the participant's distributions from the Retirement Plan, except in the event of a Change in Control, in which event the actuarial equivalent of anticipated payments will be paid immediately in a lump sum. Accruals under this Plan during the twenty-seven week period ended January 3, 1998 amounted to $321,296 and no distributions were made from the Plan during the twenty-seven week transition period ended January 3, 1998. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The executive compensation program of the Company is administered by the Compensation Committee of the Board of Directors (the "Committee"), which is comprised of three nonemployee Directors. The Committee periodically evaluates the executive compensation program to assure that it is reasonable, equitable and competitive. The Committee considers the recommendations of outside, independent compensation specialists in evaluating compensation levels, plan design, and administration. Compensation Philosophy The Committee administers each aspect of the executive compensation program in a manner that emphasizes the Company's primary long-term goals, which are the creation of consistent earnings growth and the enhancement of shareholder value in the Company's Common Stock. The Committee considers these goals to be attainable by maintaining continuity within an experienced, professional and technically proficient executive group. The compensation program is therefore designed (a) to be competitive with other similarly situated companies, (b) to be equitable by offering a reasonable level of base compensation and (c) to align the interests of the executives with those of the shareholders. The primary compensation arrangements, tailored to fulfill this philosophy and utilized by the Committee in various combinations, are as follows: Base Salary Each year, the Committee reviews the contribution made to the Company's performance by each senior executive and approves the executive's base salary. The base salary represents the Company's ongoing compensation commitment and forms the foundation for the executive compensation program. The Committee ensures that a competitive base salary is maintained for each executive by periodically reviewing the results 27 31 of independent national survey data for comparable positions in companies with a dollar sales volume similar to Flowers. Bonus Plan The Company's Bonus Plan provides for an annual incentive bonus, which is expressed as a percentage of base salary, varying by position with the Company. A bonus is awarded upon the Company's attainment of a specified earnings per share goal. In addition, the Bonus Plan is designed to provide the executive an increased award, limited to an amount determined as twice the bonus percentage established for the executive's position multiplied by the executive's base salary, if actual earnings per share significantly exceed the goal. Correspondingly, the Bonus Plan is designed to provide the executive a lesser award if actual earnings per share fall below the goal, and no award if actual earnings per share fall below eighty percent of the goal. This mechanism provides motivation for the executive to continue to strive for improved earnings per share in any given year, regardless of the fact that the goal may, or may not, be obtained. Stock Incentive Plans In keeping with the Committee's philosophy that the element of stockholder risk is an essential compensation tool, stock based incentives comprise the largest portion of the compensation program for the persons listed in the Summary Compensation Table. The Committee believes that continuation of stock based incentives is fundamental to the enhancement of shareholder value. In years prior to fiscal 1993, the Committee granted stock options under the Company's 1982 Incentive Stock Option Plan (the "1982 Plan"). The 1982 Plan expired on October 15, 1992, and therefore no additional grants will be made under the 1982 Plan, although the individuals in the executive group have available currently exercisable options with expiration dates up to the year 2001. The 1989 Executive Stock Incentive Plan (the "ESIP") is the Company's ongoing intermediate and long-term incentive plan. The ESIP provides the Committee an opportunity to make a variety of stock based awards while selecting the form that is the most appropriate for the Company and the executive group. The three types described below contain elements which focus the executive's attention on one of the Company's primary goals, the enhancement of stockholder value. NON-QUALIFIED STOCK OPTIONS: During fiscal 1996, the Committee granted non-qualified stock options under the ESIP (the "1996 Options"). The 1996 Options are exercisable at any time, commencing on the first anniversary of the grant date, until the year 2005. The executives are required to pay the market value of the shares, determined as of the grant date, which was $8.44 (the "Option Price"). The executives have no rights as shareholders with respect to the common shares subject to the 1996 Options until payment of the Option Price. The 1996 Options are subject to forfeiture in the event of termination of employment, other than for retirement, disability, death, termination without cause, or termination for any reason which the Committee determines should not result in forfeiture. EQUITY INCENTIVE AWARDS: During fiscal 1992, the Committee granted an award under the ESIP referred to as the Equity Incentive Award (the "1992 Award"). The executives were required to pay one half of the market value of the shares, determined as of the award date, no later than the termination of the last restrictions on the 1992 Award. The restrictions on the shares under the 1992 Award terminated ratably over the five-year period ended November 15, 1996. The unvested shares were subject to forfeiture in the event of termination of employment, other than for retirement, disability, death, termination without cause, or termination for any reason that the Committee determined should not result in forfeiture, prior to November 15, 1996. The executives were entitled to vote the shares and receive the Common Stock dividend during the period in which the shares were subject to forfeiture. These shares fully vested in fiscal 1997 and all shares were purchased by the executives. Consistent with the Committee's philosophy of aligning executive compensation with the shareholders' market appreciation goal, the 1992 Award provided that in the event the per share market value of the Common Stock reached or exceeded targeted per share market values of $8.00 and $10.22 prior to the 28 32 expiration of the 1992 Award on November 15, 1996, the recipient would receive additional shares. During fiscal 1993, the Common Stock targeted market value of $8.00 per share was attained and additional shares equal to one-half of the 1992 Award were granted, subject to the same terms and conditions as the 1992 Award but with a three year ratable period during which the restrictions lapsed and at a purchase price of $4.00 per share. These additional shares fully vested in fiscal 1996 and all shares were purchased by executives. During fiscal 1996, the Common Stock targeted market value of $10.22 per share was attained and additional shares equal to one-half of the 1992 Award were granted, subject to the same terms and conditions as the 1992 Award but with a three year ratable period during which the restrictions will lapse and at a purchase price of $5.11 per share. RESTRICTED STOCK AWARDS: During the twenty-seven weeks ended January 3, 1998, the Committee granted an award under the ESIP referred to as the June 1997 Restricted Stock Award (the "June 1997 Award"). The executives are required to pay one half of the market value of the shares, determined as of the grant date. The restrictions on the shares under the June 1997 Award lapse on June 15, 2001. The unvested shares are subject to forfeiture in the event of termination of employment, other than for retirement, disability, death, termination without cause, or termination for any reason that the Committee determines should not result in forfeiture, prior to June 15, 2001. The executives are entitled to vote the shares and receive the Common Stock dividend during the period in which the shares are subject to forfeiture. Compensation of Chief Executive Officer For the twenty-seven week transition period ended January 3, 1998, Mr. McMullian received a base salary of $313,096, which amount was determined by the Committee to be appropriate in consideration of the Company's performance, Mr. McMullian's leadership and contribution to the Company's performance and market conditions. Mr. McMullian was awarded a bonus of $187,858 for the twenty-seven week transition period ended January 3, 1998. During the twenty-seven week transition period ended January 3, 1998, Mr. McMullian was granted the right to purchase 56,982 shares of the Company's common stock under the terms of the June 1997 Award. Deductibility of Compensation Expenses The Company is not allowed a federal income tax deduction for compensation paid to certain executive officers in excess of $1 million, except to the extent such compensation constitutes "performance based compensation" as defined by the Internal Revenue Code. The Committee believes that the provisions of the Bonus Plan and the additional grant feature of Restricted Stock Awards made under the ESIP will result in performance based compensation and the Company will not lose any federal income tax deduction for compensation paid under these compensation programs. The Committee will consider this deduction limitation during future deliberations and will continue to act in the best interests of the Company. Summary The Committee believes the base salary and the Bonus Plan provide an efficient and effective mechanism to reward the executive group for the daily leadership required to maximize the Company's current performance. Additionally, the stock-based awards granted under the ESIP serve to align the long term interests of the executives with those of the shareholders generally so that decisions are made as owners of the Company. The Compensation Committee of the Board of Directors Joseph L. Lanier, Jr., Chairman Edward L. Baker Franklin L. Burke 29 33 TOTAL SHAREHOLDER RETURNS
MEASUREMENT PERIOD FLOWERS INDUSTRIES, (FISCAL YEAR COVERED) INC. S&P FOODS-500 S&P 500 INDEX JUN92 100 100 100 JUN93 97.42 99.74 113.63 JUN94 112.31 99.87 115.23 JUN95 125.65 129.05 145.27 JUN96 162.69 151.81 183.04 JUN97 262.80 212.28 246.55 3JAN98 322.07 250.63 273.92
Companies in the S&P Foods-500 Index are weighted by market capitalization indexed to $100 at June 30, 1992. All dividends are deemed reinvested over the reported period. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of common stock as of March 23, 1998 by (i) the only persons or groups known by the Company to own beneficially more than five percent of the Company's outstanding Common Stock, (ii) each Director of the Company, (iii) the Chief Executive Officer and each of the other Named Executive Officers, and (iv) all Directors and Executive Officers as a group. The determination of "beneficial ownership" is made pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act"). Such Rule provides that shares shall be deemed "beneficially owned" where a person or group has, either solely or in conjunction with others, the power to vote or to direct the voting of shares and/or the power to dispose, or to direct the disposition of shares; or where a person or group has the right to acquire any such power within 60 days after the date such "beneficial ownership" is determined. Each individual has beneficial ownership of the shares which are subject to any unexercised vested options held by him; and, except as indicated by footnote, each individual has sole voting power and sole investment power with respect to the number of shares beneficially owned by him. Directors and Executive Officers are required to file reports of their holdings and transactions in the Common Stock of the Company with the SEC under federal securities laws. Based solely on its review of the copies of such forms received by it, the Company believes that, for the twenty-seven weeks ended January 3, 1998, the Section 16(a) filing requirements were complied with by all Executive Officers and Directors during the period, except that a Form 4 report for Mr. Edward C. Baker was filed four months late and the Form 3 report for Mr. Jimmy M. Woodward was filed 16 days late.
AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNERSHIP OUTSTANDING STOCK ------------------------ -------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER VOTING DISPOSITIVE VOTING DISPOSITIVE - ------------------------------------ --------- ----------- ------------ ----------- Wellington Management Company............... 3,965,506(a) 8,684,735(a) less than 5% 9.82% 75 State Street Boston, MA 02109
30 34 - --------------- (a) Shared voting and shared dispositive power only. According to a Schedule 13G filed with the SEC on February 10, 1998 by Wellington Management Company ("WMC"), as of December 31, 1997, shares of the Company's Common Stock were beneficially owned by numerous investment advisory clients of WMC, none of which were known to have a beneficial interest with respect to more than 5% of the Company's outstanding Common Stock.
AMOUNT AND NATURE PERCENT NAME OF BENEFICIAL OWNERSHIP OF CLASS - ---- ----------------------- -------- Edward L. Baker............................................. 49,542(1) * Joe E. Beverly.............................................. 41,000(2) * Franklin L. Burke........................................... 7,404(3) * G. Anthony Campbell......................................... 406,803(4) * Robert P. Crozer............................................ 1,684,796(5) 1.85% L. S. Flowers............................................... 390,096(6) * Joseph L. Lanier, Jr........................................ 52,192(7) * Amos R. McMullian........................................... 1,105,146(8) 1.21% J. V. Shields, Jr........................................... 11,250(9) * Heeth Varnedoe III.......................................... 297,973(10) * C. Martin Wood III.......................................... 598,323(11) * George E. Deese............................................. 307,888(12) * Gary L. Harrison............................................ 410,947(13) * All Directors and Executive Officers as a group (15 persons).................................................. 5,392,246(14) 5.84%
- --------------- * Less than one percent. (1) Includes 16,800 shares owned by a family trust for which Mr. Baker is a co-trustee. (2) Does not include 45,982 shares owned by the spouse of Mr. Beverly and 11,164 shares owned by a trust for which his spouse is co-trustee, as to which shares Mr. Beverly disclaims any beneficial ownership. (3) Includes 3,750 shares owned by the spouse of Mr. Burke, over which shares Mr. Burke has investment authority. (4) Includes restricted stock awards of 51,574 shares, of which 40,861 shares are subject to forfeiture. (5) Includes: (i) unexercised stock options for 269,294 shares; (ii) restricted stock awards of 97,828 shares, of which 79,748 shares are subject to forfeiture; and (iii) 982,780 shares held by limited partnerships in which Mr. Crozer and his spouse are the general partners. Does not include the following shares as to which Mr. Crozer disclaims any beneficial ownership: (i) 7,593 shares held by Mr. Crozer and his spouse as custodians for their minor son; (ii) 206,710 shares held by trusts for the benefit of Mr. Crozer's minor children; and (iii) 2,006,580 shares owned by the spouse of Mr. Crozer. (6) Does not include 430,875 shares owned by the spouse of Mr. Flowers, as to which Mr. Flowers disclaims any beneficial ownership. (7) Does not include 23,890 shares owned by the spouse of Mr. Lanier, as to which Mr. Lanier disclaims any beneficial ownership. (8) Includes unexercised stock options for 225,000 shares. Also includes restricted stock awards of 167,536 shares, all of which are subject to forfeiture. (9) Does not include 3,241,503 shares owned by the spouse of Mr. Shields, as to which Mr. Shields disclaims any beneficial ownership. (10) Includes unexercised stock options for 150,000 shares. Also includes restricted stock awards of 36,160 shares, all of which are subject to forfeiture. (11) Includes: (i) unexercised stock options for 56,250 shares; (ii) restricted stock awards of 51,574 shares, of which 40,861 shares are subject to forfeiture; and (iii) 51,300 shares held by a trust of which Mr. Wood is co-trustee with shared voting and investment power. Does not include the following shares, as to which Mr. Wood disclaims any beneficial ownership: 2,904,009 shares owned by the spouse of Mr. Wood and 25,650 shares held by Mr. Wood as custodian for a nephew. 31 35 (12) Includes (i) unexercised stock options for 90,000 shares, (ii) restricted stock awards of 66,635 shares, of which 54,421 shares are subject to forfeiture, and (iii) 628 shares held by Mr. Deese as custodian for his minor grandchildren. Does not include 22,708 shares owned by the spouse of Mr. Deese, as to which Mr. Deese disclaims any beneficial ownership. (13) Includes unexercised stock options for 145,544 shares and restricted stock awards of 66,635 shares, of which 54,421 shares are subject to forfeiture. (14) Includes unexercised stock options for 976,964 shares. Also includes restricted stock awards of 559,296 shares, of which 474,007 shares are subject to forfeiture. Does not include the shares with respect to which beneficial ownership is disclaimed as indicated in the preceding footnotes. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K A. LIST OF DOCUMENTS FILED AS PART OF THIS REPORT 1. A. FINANCIAL STATEMENTS OF THE REGISTRANT Report of independent accountants Consolidated balance sheet at January 3, 1998, June 28, 1997 and June 29, 1996 Consolidated statement of income for the twenty-seven week transition period ended January 3, 1998, the fifty-two weeks ended June 28, 1997, June 29, 1996 and July 1, 1995 Consolidated statement of changes in stockholders' equity for the twenty-seven week transition period ended January 3, 1998, the fifty-two weeks ended June 28, 1997, June 29, 1996 and July 1, 1995 Consolidated statement of cash flows for the twenty-seven week transition period ended January 3, 1998, the fifty-two weeks ended June 28, 1997, June 29, 1996 and July 1, 1995 Notes to consolidated financial statements 1. B. FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY AND UB INVESTMENTS US INC. AND SUBSIDIARIES (INCLUDED AS EXHIBIT 99.1 HERETO) Report of Independent Accountants Consolidated Balance Sheets at January 3, 1998 and December 28, 1996 Consolidated Statements of Operations for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995 Consolidated Statements of Shareholders' Equity (Deficit) for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995 Consolidated Statements of Cash Flows for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995 Notes to Consolidated Financial Statements 2. A. FINANCIAL STATEMENT SCHEDULES OF THE REGISTRANT Report of Independent Accountants on Financial Statement Schedule Schedule II Valuation and Qualifying Accounts -- for the fiscal years ended January 3, 1998, June 28, 1997, June 29, 1996 and July 1, 1995
32 36 2. B. FINANCIAL STATEMENT SCHEDULES OF KEEBLER FOODS COMPANY (INCLUDED AS EXHIBIT 99.2 HERETO) 3. Report of Independent Accountants on Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995 EXHIBITS 2 Stock Purchase and Stockholder's Agreement dated as of January 28, 1998 by and among Flowers, Bermore, Ltd, Artal Luxembourg, S.A. and Keebler (Incorporated by reference to the Company's Report on Form 8-K dated February 18, 1998, File No. 1-9787) 3 (a) Second Restated Articles of Incorporation (as amended) (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 13, 1997, File No. 1-9787) 3 (b) Restated By-Laws, as of October 20, 1989 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992, File No. 1-9787) 4 (a) Rights Agreement dated as of March 17, 1989 between the Company and the Rights Agent (Incorporated by reference to the Company's Registration Statement on Form 8-A filed March 21, 1989, as amended, File No. 1-9787) 4 (a)(1) First Addendum to Rights Agreement dated as of June 6, 1992 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992, File No. 1-9787). 10 (a)(1) Flowers Industries, Inc. Annual Executive Bonus Plan dated August 4, 1995 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended July 1, 1995, File No. 1-9787)* 10 (a)(2) First Amendment to the Flowers Industries, Inc. Annual Executive Bonus Plan*++ 10 (b) Flowers Industries, Inc. 401(k) Retirement Savings Plan (Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 13, 1995, File No. 33-91198)* 10 (c) Severance Policy (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended July 1, 1989, File No. 1-9787)* 10 (d) 1982 Incentive Stock Option Plan, as amended (Incorporated by reference to the Company's Registration Statement on Form S-3/S-8 filed May 18, 1990, File No. 33-34855)* 10 (e) 1989 Executive Stock Incentive Plan (Incorporated by reference to the Company's Registration Statement on Form S-3/S-8 filed May 18, 1990, File No.33-34855)* 10 (e)(1) Amendment to the 1989 Executive Stock Incentive Plan, dated as of August 4, 1995 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended July 1, 1995, File No. 1-9787)* 10 (e)(2) Second Amendment to Flowers Industries, Inc. 1989 Executive Stock Incentive Plan*++ 10 (f) Flowers Industries, Inc. 1990 Supplemental Executive Retirement Plan (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, File No. 1-9787)* 10 (g) Flowers Industries, Inc. Nonemployee Directors' Equity Plan*++ 10 (h) Stock Purchase Agreement dated as of November 5, 1995, between INFLO Holdings Corporation and UB Investments (Netherlands) BV, as amended by agreement dated January 26, 1996 (Incorporated by reference to the Company's Report on Form 8-K(A) dated April 10, 1996, File No. 1-9787) 10 (h) Note Purchase Agreement dated as of December 20, 1995, among Flowers and the Purchasers named therein, as amended by First Amendment effective as of January 23, 1998, as further amended by Second Amendment effective as of March 12, 1998++ 10 (i) Acquisition Agreement dated as of May 1, 1996, among Flowers Industries, Inc., Mrs. Smith's Bakeries, a wholly-owned subsidiary of Flowers Industries, Inc., The J. M. Smucker Company, and Mrs. Smith's, Inc., a wholly-owned subsidiary of The J. M. Smucker Company (Incorporated by reference to the Company's Report on Form 8-K dated June 13, 1996, File No. 1-9787)
33 37 10 (i) $500,000,000 Amended and Restated Credit Agreement dated as of January 30, 1998, among Flowers, certain Banks listed therein, Wachovia Bank, N.A., as Agent, The Bank of Nova Scotia, as Documentation Agent and NationsBank, N.A. as Syndicating Agent (Incorporated by reference to the Company's Report on Form 8-K dated February 18, 1998, File No. 1-9787) 10 (j) Agreement dated as of May 5, 1997, between the Company and Heeth Varnedoe III (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997, File No. 1-9787.)* 11 Statement re computation of per share earnings++ 21 Subsidiaries of the Registrant++ 23 (a) Consent of Price Waterhouse, LLP, Independent Accountants++ Consent of Coopers & Lybrand, L.L.P., Independent 23 (b) Accountants++ 27 Financial Data Schedule++ 99.1 Financial Statements of Keebler Foods Company and UB Investments US Inc. and Subsidiaries++ 99.2 Financial Statement Schedules of Keebler Foods Company++ 99.3 Portions of the Annual Report on Form 10-K for the fiscal year ended January 3, 1998 of Keebler Foods Company++
- --------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K. ++ Filed herewith. B. REPORTS ON FORM 8-K The Company filed a report on Form 8-K on February 18, 1998, as amended by the Form 8-K/A filed on March 13, 1998 to report the Company's acquisition of a majority interest in Keebler Foods Company, a Delaware corporation, and the change in the Company's fiscal year. 34 38 For purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-3/S-8, File No. 33-34855; and on Form S-8, File No. 33-91198 and File No. 333-23351. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 35 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Flowers Industries, Inc. has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized as of March 27, 1998. FLOWERS INDUSTRIES, INC. /s/ AMOS R. MCMULLIAN /s/ ROBERT P. CROZER /s/ C. MARTIN WOOD III ----------------------------- ----------------------------- ----------------------------- Amos R. McMullian Robert P. Crozer C. Martin Wood III Chairman of the Board and Vice Chairman of the Board Senior Vice President and Chief Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ AMOS R. MCMULLIAN Chairman of the Board, March 24, 1998 - ----------------------------------------------------- Chairman of the Executive Amos R. McMullian Committee and Chief Executive Officer /s/ ROBERT P. CROZER Vice Chairman of the Board and March 27, 1998 - ----------------------------------------------------- a Director Robert P. Crozer /s/ C. MARTIN WOOD III Senior Vice President, Chief March 27, 1998 - ----------------------------------------------------- Financial Officer and a C. Martin Wood III Director /s/ EDWARD L. BAKER Director March 24, 1998 - ----------------------------------------------------- Edward L. Baker /s/ JOE E. BEVERLY Director March 27, 1998 - ----------------------------------------------------- Joe E. Beverly /s/ FRANKLIN L. BURKE Director March 27, 1998 - ----------------------------------------------------- Franklin L. Burke /s/ G. ANTHONY CAMPBELL General Counsel, Secretary and March 27, 1998 - ----------------------------------------------------- a Director G. Anthony Campbell /s/ LANGDON S. FLOWERS Director March 24, 1998 - ----------------------------------------------------- Langdon S. Flowers /s/ JOSEPH L. LANIER, JR. Director March 27, 1998 - ----------------------------------------------------- Joseph L. Lanier, Jr. /s/ J. V. SHIELDS, JR. Director March 27, 1998 - ----------------------------------------------------- J. V. Shields, Jr. /s/ HEETH VARNEDOE III Director March 27, 1998 - ----------------------------------------------------- Heeth Varnedoe III /s/ JIMMY M. WOODWARD Treasurer and Chief March 27, 1998 - ----------------------------------------------------- Accounting Officer Jimmy M. Woodward
36 40 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of independent accountants........................... F-2 Consolidated balance sheet at January 3, 1998, June 28, 1997 and June 29, 1996......................................... F-3 Consolidated statement of income for the twenty-seven weeks ended January 3, 1998, and the fifty-two weeks ended June 28, 1997, June 29, 1996 and July 1, 1995.................. F-4 Consolidated statement of changes in stockholders' equity for the twenty-seven weeks ended January 3, 1998, and the fifty-two weeks ended June 28, 1997, June 29, 1996 and July 1, 1995.............................................. F-5 Consolidated statement of cash flows for the twenty-seven weeks ended January 3, 1998, and the fifty-two weeks ended June 28, 1997, June 29, 1996 and July 1, 1995............. F-7 Notes to consolidated financial statements.................. F-9
F-1 41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Flowers Industries, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Flowers Industries, Inc. and its subsidiaries at January 3, 1998, June 28, 1997 and June 29, 1996, and the results of their operations and their cash flows for the twenty-seven week transition period ended January 3, 1998 and for each of the three fiscal years in the period ended June 28, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully discussed in Note 1 of the Notes to Consolidated Financial Statements, during the twenty-seven week transition period ended January 3, 1998, the Company changed its method of accounting for business process reengineering costs incurred in connection with an information technology project, pursuant to Emerging Issues Task Force Consensus No. 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation." In addition, as more fully discussed in Note 1 of the Notes to Consolidated Financial Statements, during the twenty-seven week transition period ended January 3, 1998, the Company changed the measurement date used in its accounting for pensions. /s/ PRICE WATERHOUSE LLP Atlanta, Georgia March 23, 1998 F-2 42 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
JANUARY 3, JUNE 28, JUNE 29, 1998 1997 1996 ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................. $ 3,866 $ 31,080 $ 25,039 Accounts receivable....................................... 118,147 113,628 120,301 Inventories............................................... 105,431 104,577 68,576 Prepaid expenses.......................................... 9,421 7,825 5,319 Deferred income taxes..................................... 16,024 14,421 10,992 --------- --------- --------- 252,889 271,531 230,227 --------- --------- --------- Property, Plant and Equipment: Land...................................................... 20,388 20,692 23,386 Buildings................................................. 208,179 206,469 183,502 Machinery and equipment................................... 443,739 446,016 393,319 Furniture, fixtures and transportation equipment.......... 28,095 24,774 21,365 Construction in progress.................................. 46,262 49,062 63,005 --------- --------- --------- 746,663 747,013 684,577 Less: accumulated depreciation............................ (308,342) (299,014) (264,107) --------- --------- --------- 438,321 447,999 420,470 --------- --------- --------- Other Assets: Investment in unconsolidated affiliate.................... 100,663 77,071 68,326 Notes receivable from distributors........................ 61,236 Other long-term assets.................................... 32,620 33,133 24,567 --------- --------- --------- 133,283 110,204 154,129 --------- --------- --------- Cost in Excess of Net Tangible Assets....................... 78,368 70,939 45,962 Less: accumulated amortization............................ (3,480) (2,486) (1,345) --------- --------- --------- 74,888 68,453 44,617 --------- --------- --------- $ 899,381 $ 898,187 $ 849,443 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Commercial paper outstanding.............................. $ 53,506 $ 40,792 $ Current portion of long-term debt......................... 1,581 6,625 6,593 Obligations under capital leases.......................... 2,651 2,608 1,988 Accounts payable.......................................... 72,311 78,451 98,796 Accrued taxes other than income taxes..................... 5,230 6,276 5,369 Income taxes.............................................. 220 1,264 Other accrued liabilities................................. 97,333 107,497 67,738 --------- --------- --------- 232,612 242,469 181,748 --------- --------- --------- Long-Term Notes Payable..................................... 259,249 259,884 254,355 --------- --------- --------- Obligations Under Capital Leases............................ 4,012 2,413 2,573 --------- --------- --------- Industrial Revenue Bonds.................................... 12,950 12,950 17,770 --------- --------- --------- Deferred Income Taxes....................................... 39,686 38,886 47,270 --------- --------- --------- Deferred Compensation....................................... 2,305 1,573 --------- --------- --------- Deferred Income............................................. 40,403 --------- --------- --------- Commitments and Contingencies............................... --------- --------- --------- Stockholders' Equity: Preferred stock -- $100 par value, authorized 10,467 shares and none issued.................................. Preferred stock -- $100 par value, authorized 249,533 shares and none issued.................................. Common stock -- $.625 par value, authorized 350,000,000 shares, issued 88,636,089 shares........................ 55,398 55,398 55,398 Capital in excess of par value............................ 45,200 43,147 40,317 Retained earnings......................................... 266,734 260,094 234,069 Less: Common stock in treasury, 207,670, 563,076 and 761,010 shares, respectively............................ (2,452) (6,567) (6,493) Restricted Stock Award and Equity Incentive Award.... (16,313) (12,060) (17,967) --------- --------- --------- 348,567 340,012 305,324 --------- --------- --------- $ 899,381 $ 898,187 $ 849,443 ========= ========= =========
(See Accompanying Notes to Consolidated Financial Statements) F-3 43 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
FOR THE 27 WEEKS ENDED FOR THE 52 WEEKS ENDED ---------- ------------------------------------ JANUARY 3, JUNE 28, JUNE 29, JULY 1, 1998 1997 1996 1995 ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Sales............................................ $784,097 $1,437,713 $1,238,564 $1,129,203 Gain on sale of distributor notes receivable..... 43,244 Other income..................................... 2,442 3,540 7,909 10,751 Gain on issuance of additional stock of unconsolidated affiliate....................... 4,111 -------- ---------- ---------- ---------- 786,539 1,484,497 1,250,584 1,139,954 -------- ---------- ---------- ---------- Materials, supplies, labor and other production costs.......................................... 418,926 787,799 674,762 599,416 Selling, delivery and administrative expenses.... 303,868 537,825 468,695 428,833 Depreciation and amortization.................... 26,930 45,970 40,848 36,604 Interest......................................... 11,796 25,109 13,004 7,086 Accrual for litigation settlement................ 4,935 -------- ---------- ---------- ---------- 761,520 1,396,703 1,202,244 1,071,939 -------- ---------- ---------- ---------- Income before income taxes....................... 25,019 87,794 48,340 68,015 Federal and state income taxes................... 9,632 33,191 18,185 25,714 Income from investment in unconsolidated affiliate...................................... 18,061 7,721 613 -------- ---------- ---------- ---------- Income before cumulative effect of changes in accounting principles.......................... 33,448 62,324 30,768 42,301 Cumulative effect of changes in accounting principles, net of tax benefit of $6,146....... (9,888) -------- ---------- ---------- ---------- Net income....................................... $ 23,560 $ 62,324 $ 30,768 $ 42,301 ======== ========== ========== ========== Earnings Per Common Share -- Basic Income before cumulative effect of changes in accounting principles....................... $ .38 $ .71 $ .35 $ .49 Cumulative effect of changes in accounting principles, net of tax...................... (.11) -------- ---------- ---------- ---------- Net income per common share.................... $ .27 $ .71 $ .35 $ .49 ======== ========== ========== ========== Weighted average shares outstanding............ 88,368 88,000 86,933 86,229 ======== ========== ========== ========== Earnings Per Common Share -- Diluted Income before cumulative effect of changes in accounting principles....................... $ .38 $ .71 $ .35 $ .49 Cumulative effect of changes in accounting principles, net of tax...................... (.11) -------- ---------- ---------- ---------- Net income per common share.................... $ .27 $ .71 $ .35 $ .49 ======== ========== ========== ========== Weighted average shares outstanding............ 88,773 88,401 87,211 86,438 ======== ========== ========== ==========
(See Accompanying Notes to Consolidated Financial Statements) F-4 44 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK RESTRICTED ---------------------- TREASURY STOCK STOCK AWARD NUMBER OF CAPITAL IN ----------------------- AND EQUITY SHARES EXCESS OF RETAINED NUMBER OF INCENTIVE ISSUED PAR VALUE PAR VALUE EARNINGS SHARES COST AWARD ---------- --------- ---------- --------- ----------- --------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Balances at July 2, 1994................. 86,269,670 $53,919 $ 21,083 $ 225,601 (1,893,522) $ (15,200) $ (9,672) Stock issued for acquisitions......... 2,366,419 1,479 15,872 198,598 1,594 Exercise of employee stock options........ (178) 104,449 841 Purchase of treasury stock................ (554,745) (4,426) Net income for the year................. 42,301 Exercise of Restricted Stock Award.......... 63 (74,634) (572) 708 Amortization of Restricted Stock Award and Equity Incentive Award...... 1,825 Dividends paid -- $.3622 per common share......... (31,257) ---------- ------- --------- --------- ----------- --------- -------- Balances at July 1, 1995................. 88,636,089 55,398 36,840 236,645 (2,219,854) (17,763) (7,139) Stock issued for acquisitions......... 180 137,003 1,119 Exercise of employee stock options........ (764) 285,366 2,337 Purchase of treasury stock................ (144,840) (1,303) Net income for the year................. 30,768 Exercise of Restricted Stock Award.......... 769 (187,596) (1,650) 1,526 Exercise of Equity Incentive Award...... 301 (169,931) (1,830) 1,434 Stock issued into escrow in connection with Restricted Stock Award................ 2,286 1,180,295 9,640 (11,918) Stock issued into escrow in connection with Equity Incentive Award................ 705 358,547 2,957 (3,662) Amortization of Restricted Stock Award and Equity Incentive Award...... 1,792 Dividends paid -- $.3833 per common share......... (33,344) ---------- ------- --------- --------- ----------- --------- -------- Balances at June 29, 1996................. 88,636,089 55,398 40,317 234,069 (761,010) (6,493) (17,967)
F-5 45 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
COMMON STOCK RESTRICTED ---------------------- TREASURY STOCK STOCK AWARD NUMBER OF CAPITAL IN ----------------------- AND EQUITY SHARES EXCESS OF RETAINED NUMBER OF INCENTIVE ISSUED PAR VALUE PAR VALUE EARNINGS SHARES COST AWARD ---------- --------- ---------- --------- ----------- --------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Stock issued for acquisition.......... 1,025 322,233 2,975 Exercise of employee stock options........ (1,017) 400,853 3,988 Purchase of treasury stock................ (19,335) (289) Net income for the year................. 62,324 Exercise of Restricted Stock Award.......... 1,072 (78,106) (1,362) 1,169 Exercise of Equity Incentive Award...... 1,854 (151,469) (2,365) 1,738 Restricted Stock Award Reversions........... (104) (56,430) (456) 557 Amortization of Restricted Stock Award and Equity Incentive Award...... 2,443 Stock received from escrow............... (219,812) (2,565) Dividends paid -- $.4125 per common share......... (36,299) ---------- ------- --------- --------- ----------- --------- -------- Balances at June 28, 1997................. 88,636,089 55,398 43,147 260,094 (563,076) (6,567) (12,060) Exercise of employee stock options........ 45,000 524 Purchase of treasury stock................ (6,227) (117) Net income for the 27 weeks ended January 3, 1998.............. 23,560 Equity from investment in unconsolidated affiliate............ 2,700 Stock issued into escrow in connection with Restricted Stock Award................ 2,118 347,609 3,965 (6,083) Restricted Stock Award Reversions........... (65) (30,976) (257) 435 Amortization of Restricted Stock Award and Equity Incentive Award...... 1,395 Dividends paid -- $.2225 per common share......... (19,620) ---------- ------- --------- --------- ----------- --------- -------- Balances at January 3, 1998................. 88,636,089 $55,398 $ 45,200 $ 266,734 207,670 $ (2,452) $(16,313) ========== ======= ========= ========= =========== ========= ========
(See Accompanying Notes to Consolidated Financial Statements) F-6 46 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 27 WEEKS ENDED FOR THE 52 WEEKS ENDED ----------- ------------------------------------ JANUARY 3, JUNE 28, JUNE 29, JULY 1, 1998 1997 1996 1995 ----------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Cash received from customers................. $ 779,029 $1,438,870 $1,232,963 $1,117,262 Interest received............................ 325 824 7,741 7,159 Sale of distributor notes receivable......... 65,954 Other........................................ 3,055 6,080 5,416 5,890 --------- ---------- ---------- ---------- Cash provided by operating activities.......... 782,409 1,511,728 1,246,120 1,130,311 --------- ---------- ---------- ---------- Cash paid to suppliers and employees......... 739,575 1,373,583 1,161,431 1,009,931 Interest paid................................ 11,878 25,955 8,582 6,465 Income taxes paid............................ 10,867 32,729 16,748 20,379 --------- ---------- ---------- ---------- Cash disbursed for operating activities........ 762,320 1,432,267 1,186,761 1,036,775 --------- ---------- ---------- ---------- Net cash provided by operating activities (See Schedule 1).................................. 20,089 79,461 59,359 93,536 --------- ---------- ---------- ---------- Cash flows from investing activities: Purchase of property, plant and equipment.... (32,857) (77,510) (75,542) (73,466) Acquisition of businesses.................... (7,931) (28,118) (17,018) Divestiture of businesses.................... 200 1,061 22,679 Decrease in divestiture receivables.......... 2,399 417 173 Investment in unconsolidated affiliate....... (61,352) Escrow funds................................. 4,835 Other........................................ 2,145 63 (6,485) (1,845) --------- ---------- ---------- ---------- Net cash disbursed for investing activities.... (36,244) (76,830) (170,263) (64,815) --------- ---------- ---------- ---------- Cash flows from financing activities: Dividends paid............................... (19,620) (36,299) (33,344) (31,257) Purchase of treasury stock................... (117) (289) (1,303) (4,426) Increase in short-term notes payable......... 7,713 40,792 Increase in long-term notes payable.......... 356,000 524,400 356,625 151,391 Payments of long-term notes payable.......... (355,035) (525,194) (217,871) (132,351) --------- ---------- ---------- ---------- Net cash (disbursed for) provided by financing activities................................... (11,059) 3,410 104,107 (16,643) --------- ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents.................................. $ (27,214) $ 6,041 $ (6,797) $ 12,078 ========= ========== ========== ==========
F-7 47 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
FOR THE 27 WEEKS ENDED FOR THE 52 WEEKS ENDED ----------- ------------------------------------ JANUARY 3, JUNE 28, JUNE 29, JULY 1, 1998 1997 1996 1995 ----------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) SCHEDULE 1. Schedule Reconciling Earnings to Net Cash Provided by Operating Activities: Net income................................ $ 23,560 $ 62,324 $ 30,768 $ 42,301 Noncash expenses, revenues, losses and gains included in income: Depreciation and amortization........... 26,930 45,970 40,848 36,604 Gain on sale of distributor notes receivable........................... (43,244) Deferred income taxes................... (803) 1,506 3,494 2,847 Cumulative effect of changes in accounting principles................ 9,888 Gain on issuance of additional stock of unconsolidated affiliate............. (4,111) Net income from investment in unconsolidated affiliate............. (18,061) (7,721) (613) Changes in assets and liabilities, net of acquisitions and divestitures: (Increase) decrease in accounts receivable........................... (2,282) 7,863 (17,742) (5,510) Increase in inventories................. (413) (36,144) (12,821) (4,651) Increase in prepaid expenses............ (1,495) (2,242) (1,650) (86) Decrease in distributor notes receivable........................... 65,954 (Decrease) increase in accounts payable.............................. (6,685) (21,082) 28,029 5,859 (Decrease) increase in accrued taxes and other liabilities.................... (10,550) 6,277 (6,843) 16,172 --------- ---------- ---------- ---------- $ 20,089 $ 79,461 $ 59,359 $ 93,536 ========= ========== ========== ========== SCHEDULE 2. Schedule of Noncash Investing and Financing Activities: Common stock issued in connection with the exercise of employee stock options........ $ 272 $ 2,971 $ 1,573 $ 663 Stock issued and held in escrow in connection with Restricted Stock Award and Equity Incentive Award........................... 6,083 15,580 Stock issued for acquisitions................ 4,000 1,299 18,945 Note payable issued in acquisition of business.................................. 15,000 Exercise of Restricted Stock Award and Equity Incentive Award........................... 3,727 3,480 572 Stock released from escrow................... 2,565
(See Accompanying Notes to Consolidated Financial Statements) F-8 48 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CHANGE IN FISCAL YEAR In January 1998, the Company changed its fiscal year-end from the Saturday nearest June 30 to the Saturday nearest December 31. As a result, the Company is reporting a twenty-seven week transition period of June 29, 1997 through January 3, 1998. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Flowers Industries, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. The Company's 45% investment interest in Keebler Foods Company is accounted for under the equity method. Equity accounting for this investment is discussed in Note 13 to the consolidated financial statements. REVENUE RECOGNITION Revenue from sale of products is recognized at the time of shipment. Sales to a single customer were approximately $84,000,000, or 10.7% of sales during the twenty-seven weeks transition period ended January 3, 1998, $163,000,000, or 11% of sales during fiscal 1997, $150,000,000, or 12% of sales during fiscal 1996 and $142,000,000, or 13% of sales during fiscal 1995. CASH AND CASH EQUIVALENTS The Company considers deposits in banks, certificates of deposits and short-term investments with original maturities of three months or less as cash and cash equivalents for the purposes of the statement of cash flows. The major components of cash and cash equivalents are as follows:
JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 --------------- ------------- ------------- (AMOUNTS IN THOUSANDS) Cash............................................ $ $11,010 $10,484 Time deposits................................... 3,866 20,070 14,555 ------ ------- ------- Total................................. $3,866 $31,080 $25,039 ====== ======= =======
ACCOUNTS RECEIVABLE Accounts receivable consists of trade receivables, current portion of distributor notes receivable and miscellaneous receivables. As the Company has historically experienced an insignificant amount of uncollectible accounts, when a receivable balance is determined to be uncollectible, it is charged directly to expense. CONCENTRATION OF CREDIT RISK The Company grants credit to its distributors and customers, who are primarily in the grocery, foodservice, restaurant and fast-food markets. INVENTORY Inventories are carried at the lower of cost (primarily first-in, first-out) or market. HEDGING TRANSACTIONS -- RAW MATERIAL COSTS The Company's primary raw materials are flour, sugar, shortening and fruit. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The F-9 49 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company enters into various forward purchase agreements and other derivative financial instruments to reduce the impact of volatility in ingredients prices. Amounts payable or receivable under the agreements which qualify as hedges are recognized as deferred gains or losses and are included in other assets or other liabilities. These deferred amounts are charged or credited to cost of sales as the related raw materials costs used in production. Gains and losses on agreements which do not qualify as hedges are recognized immediately as other income or expense. At January 3, 1998, the Company had no material commitments outstanding relating to derivative financial instruments. During June 1997, the Company entered into an arrangement that allows for the Company to engage in commodity price agreements based on fixed and floating prices of an agreed type of commodity. At January 3, 1998, no material amounts were outstanding under this agreement. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION The Company provides depreciation for financial reporting purposes over the estimated useful lives of fixed assets using the straight-line method. Upon retirement or sale of fixed assets, the book value is removed from the accounts and the difference between such net book value and salvage value received is recorded in income. Expenditures for maintenance and repairs are charged to expense; renovations and improvements are capitalized. The approximate annual rates of depreciation are 3% to 5% for buildings, 8% for machinery and equipment and 10% to 25% for furniture, fixtures and transportation equipment. Depreciation expense for the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $25,936,000, $44,829,000, $40,559,000 and $35,874,000, respectively. INTERNALLY DEVELOPED SOFTWARE The Company capitalizes certain costs, primarily hardware, software, and installation costs, associated with internally developed software projects. Such amounts are depreciated over periods not to exceed seven years. The Company does not anticipate that Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed, or Obtained for Internal Use," will have a material impact on the Company's results of operations or financial condition. As further discussed below, during the twenty-seven week period ended January 3, 1998, the Company recorded a cumulative after-tax charge of $8,842,000, to write off business process reengineering costs that had been incurred as part of an information systems development project. ADVERTISING AND CONSUMER PROMOTION Advertising and consumer promotion costs are generally expensed as incurred or no later than when the advertisement appears or the event is run. Advertising and consumer promotion expense was approximately $16,998,000 for the twenty-seven weeks ended January 3, 1998, $19,063,000 for fiscal 1997, $15,081,000 for fiscal 1996 and $15,875,000 for fiscal 1995. There are no deferred advertising costs at January 3, 1998, June 28, 1997 or June 29, 1996. NOTES RECEIVABLE AND DEFERRED INCOME The Company sells its territories to independent distributors. The income from these sales is recognized as the cash payments are received. The sales of the territories were previously financed by the Company with ten year notes. In September 1996, the Company sold these notes, which totaled approximately $66,000,000, to a financial institution. The proceeds were used to repay debt outstanding at that time. Of the notes sold, approximately $44,000,000 were initially without recourse to the Company with approximately $22,000,000 having limited recourse. Concurrently, approximately $43,000,000 of deferred pre-tax income was recognized F-10 50 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) by the Company during fiscal 1997. Subsequent to September 1996, all distributor purchase arrangements are made directly between the distributor and a financial institution and, pursuant to an agreement, the Company acts as the servicing agent for the financial institution and receives a fee for these services. Such fees aggregated $2,317,000 and $5,029,000 during the twenty-seven weeks ended January 3, 1998 and fiscal 1997, respectively. AMORTIZATION OF INTANGIBLE ASSETS Costs in excess of the net tangible assets acquired are, in the opinion of management, attributable to long-lived intangibles having continuing value. Excess amounts related to the purchases of businesses are amortized over forty years from the acquisition date using the straight-line method. Costs of purchased trademark rights are amortized over the period of expected future benefit, which is approximately ten to forty years. At each balance sheet date, the Company assesses whether there has been an impairment of long-lived assets and the related unamortized goodwill, based on whether certain indicators of impairment are present. If such indicators are present, the Company evaluates whether an impairment exists by comparing the gross, undiscounted cash flows to the carrying value of the related asset. Amortization expense for the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $994,000, $1,141,000, $289,000 and $730,000, respectively. TREASURY STOCK The Company records acquisitions of its common stock for treasury at cost. Differences between proceeds for reissuances of treasury stock and average cost are credited to capital in excess of par value or charged to capital in excess of par value to the extent of prior credits and thereafter to retained earnings. PENSION PLANS The Company accounts for pensions in accordance with Statement of Financial Accounting Standards No. 87 -- "Employers' Accounting for Pensions." Pension accounting information is disclosed in Note 8 to the consolidated financial statements. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 -- "Accounting for Income Taxes" (SFAS 109). SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Income tax accounting information is disclosed in Note 9 to the consolidated financial statements. NET INCOME PER COMMON SHARE The Company computes net income per common share in accordance with Statement of Financial Accounting Standards No. 128 -- "Earnings Per Share" (SFAS 128). Basic earnings per share in computed by dividing net income by weighted average common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by weighted average common and common equivalent shares outstanding for the period. Common stock equivalents consist of the incremental shares associated with the Company's stock option plans, as determined under the treasury stock method. Earnings per share information for years prior to the twenty-seven weeks ended January 3, 1998, has been restated in accordance with SFAS 128. F-11 51 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CHANGES IN ACCOUNTING PRINCIPLES On November 20, 1997, the Emerging Issues Task Force (EITF), a subcommittee of the Financial Accounting Standards Board, issued EITF 97-13, which requires the cost of business process reengineering activities that are part of an information systems development project be expensed as those costs are incurred. Any unamortized costs that were previously capitalized were required to be written off as a cumulative adjustment in the quarter that included November 20, 1997. During the twenty-seven week period ended January 3, 1998, the Company recorded a cumulative after-tax charge of $8,842,000, or $.10 per share, as a result of its adoption of this pronouncement. These costs were attributable to a state-of-the-art management information system at the Company's Mrs. Smith's Bakeries locations. The Company measures its pension plan assets three months prior to the beginning of its fiscal year. As a result of the Company's changing its fiscal year, the measurement date has changed from March 31 to September 30. This change resulted in a cumulative adjustment, net of tax, of $1,046,000, or $.01 per share, for the twenty-seven week period ended January 3, 1998. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. BUSINESS SEGMENTS The Company's only business is to provide quality fresh and frozen baked food products to grocery, foodservice, restaurant and fast-food markets. NOTE 2. INVENTORIES The major components of inventories are as follows:
JANUARY 3, JUNE 28, JUNE 29, 1998 1997 1996 ---------- -------- -------- (AMOUNTS IN THOUSANDS) Ingredients and raw materials........................... $ 27,310 $ 25,479 $14,951 Packaging materials..................................... 13,149 12,500 10,988 Finished goods.......................................... 44,650 47,314 25,527 Supplies................................................ 20,322 19,284 17,110 -------- -------- ------- Total......................................... $105,431 $104,577 $68,576 ======== ======== =======
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 -- "Disclosure about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. The carrying value of cash and cash equivalents, notes receivable from distributors, other notes receivable, industrial revenue bonds and long-term debt payable to financial institutions approximates fair value at January 3, 1998, June 28, 1997 and June 29, 1996. F-12 52 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. DEBT In July 1996, the Company entered into a five-year $300,000,000 syndicated loan facility, of which, $122,000,000 was outstanding at January 3, 1998. Amounts are borrowed under this facility for periods not to exceed 180 days and can be reborrowed as necessary during the term of the facility. Interest under the syndicated loan facility is generally payable monthly and is variable based on a performance grid using a choice of LIBOR plus .375% or money market rates. Subsequent to fiscal year-end, on January 30, 1998, this facility was amended to become a five-year $500,000,000 syndicated loan facility. Interest under the amended facility is generally payable monthly and is variable based on a performance grid using a choice of LIBOR plus .475% or money market rates. Subsequent to period end, the Company borrowed $422 million under the amended facility. Such proceeds were primarily used to finance the acquisition of a controlling interest in Keebler. In October 1997, the Company amended its short-term commercial paper program to increase the limit from $50,000,000 to $75,000,000 for use in financing inventory. Borrowings under this program at January 3, 1998 were $53,506,000. In January 1996, the Company completed a private placement of $125,000,000 of long-term Senior Notes. These notes are due in three tranches: $100,000,000 due in semi-annual instalments from January 5, 2004 through January 5, 2008 which bears interest at 6.80% per annum; $20,000,000 due January 5, 2011 which bears interest at 6.99% per annum; and $5,000,000 due January 5, 2016 which bears interest at 7.08% per annum. Interest on the Senior Notes is payable semiannually. A portion of the proceeds were used to pay off $114,150,000 of debt that was outstanding at that time, with the remaining proceeds being used for working capital and for other general corporate purposes. The Company also has a $10,000,000 revolving-term loan agreement entered into in March of 1993, of which no amounts were outstanding at January 3, 1998. Several loan agreements of the Company contain restrictions which, among other things, require maintenance of certain financial ratios and restrict encumbrance of assets and creation of indebtedness. At January 3, 1998, the Company was in compliance with these financial ratio requirements. F-13 53 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total debt consists of:
JANUARY 3, JUNE 28, JUNE 29, 1998 1997 1996 ---------- -------- -------- (AMOUNTS IN THOUSANDS) Private placement long-term Senior Notes with interest from 6.80% to 7.08% payable in instalments from 2004 through 2016........................................ $125,000 $125,000 $125,000 Borrowings under syndicated loan facility with interest from 5.98% to 6.45%........................ 122,000 117,000 Commercial paper program with interest from 5.65% to 6.25%............................................... 53,506 40,792 Borrowings under revolving-term loan agreements....... 103,375 Various industrial revenue bonds with interest from 4.20% to 6.00% payable in instalments through 2017 secured by property................................. 13,170 13,170 18,170 Borrowings scheduled to mature in equal instalments over the next two years with interest from 5.64% to 6.49%............................................... 10,000 15,000 Various unsecured notes payable with interest of approximately 7.5%, payable in instalments through 2004................................................ 13,610 14,289 17,173 -------- -------- -------- 327,286 320,251 278,718 Due within one year................................... 55,087 47,417 6,593 -------- -------- -------- Due after one year.................................... $272,199 $272,834 $272,125 ======== ======== ========
Annual maturities of long-term debt for each of the six years following January 3, 1998 are $1,581,000 (excludes $53,506,000 for commercial paper), $5,819,000, $1,362,000, $1,467,000, $1,579,000 and $1,701,000, respectively. NOTE 5. COMMITMENTS AND CONTINGENCIES DESCRIPTION OF OPERATING LEASE ARRANGEMENTS The Company leases certain property and equipment under operating leases which expire over the next twenty years. Most of these operating leases provide the Company with the option, after the initial lease term, either to purchase the property at the then fair value or renew its lease at the then fair rental value for periods of one month to ten years. Generally, management expects that leases will be renewed or replaced by other leases in the normal course of business. The Company has in place a $50,000,000 ten-year master lease agreement to finance the automated production lines at certain of its facilities. At January 3, 1998, approximately $38,693,000 had been used under this agreement. F-14 54 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Minimum payments for operating leases having initial or remaining noncancelable terms in excess of one year are as follows:
(AMOUNTS IN FISCAL YEAR(S) THOUSANDS) - -------------- ---------- 1998........................................................ $15,979 1999........................................................ 13,948 2000........................................................ 11,897 2001........................................................ 9,326 2002........................................................ 8,233 2003 to termination (aggregate)............................. 29,730 ------- Total minimum lease payments...................... $89,113 =======
Total rent expense for all operating leases amounted to $16,225,000 for the twenty-seven weeks ended January 3, 1998, $24,151,000 for fiscal 1997, $16,936,000 for fiscal 1996 and $18,897,000 for fiscal 1995. OTHER COMMITMENTS The Company's various commodity purchase agreements effectively commit the Company to purchase raw materials in amounts totaling approximately $55,656,000, at January 3, 1998, which will be used in production in future periods. NOTE 6. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of:
JANUARY 3, JUNE 28, JUNE 29, 1998 1997 1996 ---------- -------- -------- (AMOUNTS IN THOUSANDS) Compensation............................................. $ 8,344 $ 13,707 $ 7,518 Vacation cost............................................ 9,779 10,277 10,030 Pension cost............................................. 12,217 12,438 8,729 Workers' compensation insurance.......................... 8,945 9,009 10,881 Other insurance.......................................... 4,484 4,799 5,013 Interest................................................. 5,113 5,195 6,041 Purchase accounting reserves............................. 34,953 35,530 Other.................................................... 13,498 16,542 19,526 ------- -------- ------- Total.......................................... $97,333 $107,497 $67,738 ======= ======== =======
NOTE 7. STOCKHOLDERS' EQUITY The Company's Articles provide that the authorized capital of the Company consists of 350,000,000 shares of Common Stock of $.625 par value per share, 10,467 shares of preferred stock, par value $100 per share convertible into Common Stock, and 249,533 shares of preferred stock, par value $100 per share that, at the discretion of the Board of Directors, may be either convertible or nonconvertible, of which 100,000 shares has been designated by the Board of Directors as Series A Junior Participating Preferred Stock ("Series A Preferred Stock"). F-15 55 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Subject to preferential rights of any issued and outstanding preferred stock, including the Series A Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors of the Company out of funds legally available therefor. In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to share ratably in all assets of the Company, if any, remaining after payment of liabilities and the liquidation preferences of any issued and outstanding preferred stock, including the Series A Preferred Stock. Holders of Common Stock have no preemptive rights, no cumulative voting rights and no rights to convert their shares of Common Stock into any other securities of the Company or any other person. The Common Stock is not subject to redemption or sinking fund redemption. PREFERRED STOCK The Board of Directors of the Company has the authority to issue up to 249,533 shares of preferred stock in one or more series and to fix the designations, relative powers, preferences, rights, qualifications, limitations and restrictions of all shares of each such series, including without limitation, dividend rates, conversion rights, voting rights, redemption and sinking fund provisions, liquidation preferences and the number of shares constituting each such series, without any further vote or action by the holders of Common Stock. Pursuant to such authority, the Board of Directors has designated 100,000 shares of preferred stock as Series A Preferred Stock in connection with the adoption of the Company's Shareholders' Rights Plan. The issuance of one or more series of preferred stock will likely decrease the amount of earnings and assets available for distribution to holders of Common Stock as dividends or upon liquidation, respectively, and may adversely affect the rights and powers, including voting rights, of the holders of Common Stock. The issuance of preferred stock also could have the effect of delaying, deterring or preventing a change in control of the Company. SHAREHOLDER RIGHTS PLAN On March 17, 1989, the Company's Board of Directors declared a dividend of one preferred share purchase right (collectively, the "Rights") for each share of Common Stock held of record on April 3, 1989. Under certain circumstances, a Right may be exercised to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock (the "Preferred Stock") at an exercise price of $33.33. The Rights become exercisable 10 days after (i) a person or group acquires 10% or more of the Company's outstanding Common Stock, or (ii) an announcement of a tender offer for 30% or more of the Company's outstanding Common Stock. If the Rights become exercisable, each Right will entitle the holder thereof to purchase one-thousandth of a share of the Preferred Stock. If a person or group acquires 10% or more of the outstanding Common Stock of the Company, the holder of each Right not owned by the 10% or more shareholder would be entitled to purchase for $33.33 (the exercise price of the Right) Common Stock of the Company having market value equal to $66.66. If the Company is a party to certain mergers or business combination transactions or transfers 50% or more of its assets or earning power, each Right will entitle its holder to buy a number of shares of Common Stock of the acquiring or surviving entity (or of the Company in certain instances) having a market value of twice the exercise price of the Right, or $66.66. If the Rights are fully exercised, the shares issued thereby would have a dilutive effect on the shares previously outstanding. The Rights expire April 2, 1999, and may be redeemed by the Company for $.01 per Right at any time prior to the close of business on the tenth day after a public announcement of an acquisition of 10% or more of the Common Stock of the Company. F-16 56 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The principal terms of the Rights are set forth in a registration statement on Form 8-A filed with the Securities and Exchange Commission and dated as of March 20, 1989. STOCK INCENTIVE PLANS The Company has 12,050,000 shares of Common Stock authorized for issuance to eligible employees under the Executive Stock Incentive Plan (ESIP). The ESIP authorizes the Compensation Committee of the Board of Directors to grant to eligible participants of the Company and its subsidiaries, through October 1999, stock options, stock appreciation rights, restricted or deferred stock awards, stock purchase rights and other stock-based awards. During the twenty-seven weeks ended January 3, 1998 and fiscal 1996, 347,609 and 1,180,295 shares, respectively, of the Company's Common Stock were granted as restricted stock awards (RSA). These shares are held in escrow by the Company and will be released to the grantee upon the grantee's satisfaction of continued employment at the same or a higher level during the restriction periods, which end June 15, 2001, June 15, 1999, May 20, 2000 and June 18, 2000, and upon payment of the purchase price of $8.75, $4.22, $5.11, and $5.89 per share, respectively. The purchase price is fifty percent of the mean of the high and low market value of the Company's Common Stock at the date of grant. The difference between the market price at the date of grant and the purchase price to be paid by the grantee is recognized ratably by the Company as compensation expense over the restriction period. This expense for the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $1,066,000, $1,661,000, $1,299,000 and $901,000, respectively. With respect to the grant issued during the twenty-seven week period ended January 3, 1998, if the mean of the high and low market value for the Company's Common Stock equals or exceeds $25.63 during the restriction period an additional 347,609 shares at a purchase price of $12.82 per share will be granted. Subsequent to year end, on February 26, 1998, the stated market value was attained and the additional shares were granted. The restriction period for this grant ends February 26, 2000. During fiscal 1996, 358,547 shares of the Company's Common Stock were granted as equity incentive awards (EIA). These shares are held in escrow by the Company and may be released ratably to the grantee upon the grantee's satisfaction of continued employment at the same or a higher level during the restriction periods which end May 20, 1999, and upon payment of the purchase price of $5.11 per share. The purchase price is fifty percent of the mean of the high and low market value of the Company's Common Stock at the date of grant. The difference between the market value at the date of grant and the purchase price to be paid by the grantee is recognized ratably by the Company as compensation expense over the restriction period. This expense for the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $329,000, $782,000, $493,000 and $924,000, respectively. During fiscal 1996, 843,750 shares of the Company's Common Stock were granted as non-qualified stock options (NQSO's). The NQSO's are exercisable at any time, commencing on the first anniversary of the grant date, until the year 2005. The optionees are required to pay the market value of the shares, determined as of the grant date, which was $8.45. As of fiscal year end January 3, 1998, June 28, 1997, and June 29, 1996, there were 787,500, 787,500 and 843,750, NQSO's outstanding, respectively. In addition to the ESIP, the Company has 377,778 shares of Common Stock authorized for issuance to key employees under the Company's Stock Option Plan. Option prices must be 100% of the market value of the Common Stock at the time of the grant. The Plan expired on October 15, 1992, therefore no additional grants will be made pursuant to this Plan. The Company has a Nonemployee Directors' Equity Plan (the "Directors' Plan") pursuant to which an aggregate 300,000 shares of Common Stock, may be issued and as to which grants or awards of stock options may be made. F-17 57 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) All individuals who are nonemployee Directors on the first day of the Company's fiscal year (a "Plan Year") are eligible to participate in the Directors' Plan. Under the Directors' Plan, the nonemployee Director may designate the amount of annual compensation payable without regard to the number of Board or committee meetings attended or committee positions held (the "Retainer") which can be invested in stock options (an "Option") under the Directors' Plan. A Director shall be permitted to invest in an Option under the Directors' Plan only if the total amount invested by that Director is equal to at least twenty-five percent (25%) of the Retainer. To the extent a Director elects to invest all or a portion of the Retainer for a Plan Year, an Option shall be granted on the first day of such Plan Year for that number of shares of Common Stock ("Shares") equal to 150% of the amount of the Retainer invested divided by the value of an Option for one Share on the Valuation Date. For this purpose, value shall be determined by the Black-Scholes option pricing model, as applied by the Committee. Subject to the expiration or earlier termination of the Option, 100% of the Option shall become exercisable on the first anniversary of the date of grant. An Option shall expire ten years from the date the Option is granted and shall be subject to earlier termination as hereinafter provided. Once an Option becomes exercisable, it may thereafter be exercised, wholly or in part, at any time prior to its expiration or termination. In the event of the Director's termination from service on the Board, an outstanding Option may be exercised only to the extent it was exercisable on the date of such termination and shall expire two years after such termination, or on its stated expiration date, whichever occurs first. Notwithstanding the above, in the event of a termination for cause as determined by the Committee, all unexercised Options shall be forfeited. The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," (APB 25) and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for options granted under the Company's Stock Option Plan or the ESIP. Had compensation expense for the options and restricted stock awards under the ESIP been determined based on the fair value at the grant dates for the awards consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123 -- "Accounting for Stock-Based Compensation", the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
FOR THE 27 WEEKS ENDED FOR THE 52 WEEKS ENDED --------------- -------------------------------------------- JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 JULY 1, 1995 --------------- ------------- ------------- ------------ (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) As Reported: Net income......................... $23,560 $62,324 $30,768 $42,301 Net income per common share: Basic........................... .27 .71 .35 .49 Diluted......................... .27 .71 .35 .49 Pro forma: Net income......................... $22,735 $61,716 $29,694 $42,301 Net income per common share: Basic........................... .26 .70 .34 .49 Diluted......................... .26 .70 .34 .49
The fair values of the awards granted were estimated as of the date of grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions used for grants during the twenty-seven weeks ended January 3, 1998: no expected dividend yield; expected volatility of 26.8 percent; risk-free interest rate of 6.31 percent; and expected lives of four years; and for grants during fiscal 1996: dividend yield of 3.43 percent; expected volatility of 24.7 percent; risk-free interest rate of 6.23 percent; and expected lives of five years. F-18 58 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity for the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 is set forth below:
FOR THE 27 WEEKS ENDED FOR THE 52 WEEKS ENDED ------------------ ------------------------------------------------------------ JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 JULY 1, 1995 ------------------ ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- ------- -------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Outstanding at beginning of year..................... 1,211 $7.52 1,664 $7.11 1,114 $5.70 1,222 $5.67 Granted.................... 844 $8.44 Exercised.................. (46) $6.06 (453) $6.03 (294) $5.59 (108) $5.40 ----- ----- ------ ----- Outstanding at end of year..................... 1,165 $7.57 1,211 $7.52 1,664 $7.11 1,114 $5.70 ===== ===== ====== ===== Exercisable at end of year..................... 1,165 1,211 820 1,114 ===== ===== ====== ===== Weighted average fair value of options granted during the year................. $ 2.91 ======
All stock options outstanding at January 3, 1998, are exercisable. The weighted average exercise price is $7.57 and the weighted average remaining contractual life is 6.39 years. NOTE 8. PENSION PLANS The Company has noncontributory defined benefit pension plans covering certain employees who have completed prescribed service requirements. The benefits are based on years of service and the employee's career earnings. The Company also has a supplemental defined benefit pension plan covering certain Company employees which provides benefits to participants commencing at retirement calculated according to the formula contained in the Company's tax-qualified retirement plan, but without regard to statutory limitations on the maximum amount of compensation which may be taken into account by, nor the maximum benefits which may be paid from, such plans. Benefits provided by this supplemental plan are reduced by benefits provided by the defined benefit pension plans. Pension expense was $2,111,000, $4,860,000, $5,660,000 and $5,003,000 in the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Pension plans are funded at amounts deductible for income tax purposes but not less than the minimum funding required by the Employee Retirement Income Security Act of 1974. As of January 3, 1998, June 28, 1997 and June 29, 1996, the assets of the plans include certificates of deposit, marketable equity securities, mutual funds, corporate and government debt securities and annuity contracts. The marketable equity securities include 506,250 shares of Common Stock of the Company with a fair value of approximately $10,346,000, $8,543,000 and $5,442,000 at January 3, 1998, June 28, 1997 and June 29, 1996, respectively. During the second quarter of fiscal 1995, the Company recognized an after-tax curtailment gain of $912,000 or $.01 per share, in accordance with Statement of Financial Accounting Standards No. 88 -- "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." The gain arose from the sale of a portion of the Company's territories to independent distributors and the termination of participation in the Flowers Industries, Inc. Retirement Plans of certain employees. F-19 59 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension costs of these plans for each of the respective periods includes the following components:
FOR THE 27 WEEKS ENDED FOR THE 52 WEEKS ENDED ----------- ----------------------------- JANUARY 3, JUNE 29, JUNE 29, JULY 1, 1998 1997 1996 1995 ----------- -------- -------- ------- (AMOUNTS IN THOUSANDS) Service cost-benefit earned during the period...................................... $ 2,846 $ 5,603 $ 5,765 $ 5,538 Interest cost on projected benefit obligation.................................. 5,207 10,311 9,341 8,261 Reduction of pension costs due to actual return on plan assets....................... (26,113) (10,415) (9,073) (8,593) Net amortization and deferral................. 20,171 (639) (373) (203) -------- -------- ------- ------- $ 2,111 $ 4,860 $ 5,660 $ 5,003 ======== ======== ======= =======
Assumptions used to determine net periodic pension cost for these plans at each of the respective period ends are as follows:
JANUARY 3, JUNE 28, JUNE 29, JULY 1, 1998 1997 1996 1995 ---------- -------- -------- ------- Discount rate....................................... 8.00% 8.00% 7.75% 8.25% Rate of increase in compensation levels............. 5.50 5.50 5.25 5.75 Expected long-term rate of return on assets......... 9.00 9.00 9.00 9.00
Flowers Industries, Inc. Retirement Plans No. 01 and 02 have assets that exceed the accumulated benefit obligation. There are certain plans, however, with accumulated benefit obligations which exceed plan assets. The following table summarizes the funded status of the Company's pension plans and the related amounts that are recognized in the Company's balance sheet at January 3, 1998, June 28, 1997 and June 29, 1996:
PLANS FOR PLANS FOR PLANS FOR PLANS FOR WHICH WHICH WHICH WHICH ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED BENEFITS ASSETS BENEFITS ASSETS --------------- --------------- --------------- --------------- JANUARY 3, 1998 JANUARY 3, 1998 JUNE 28, 1997 JUNE 28, 1997 --------------- --------------- --------------- --------------- (AMOUNTS IN THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligations: Vested................... $(118,783) $(4,810) $(112,419) $(4,696) Nonvested................ (2,604) (143) (2,387) (137) --------- ------- --------- ------- $(121,387) $(4,953) $(114,806) $(4,833) ========= ======= ========= ======= Plan assets at fair value.... $ 152,748 $ 2,080 $ 135,810 $ 2,009 Projected benefit obligations................ (139,244) (7,693) (132,122) (7,473) --------- ------- --------- ------- Plan assets in excess of (less than) projected benefit obligations........ 13,504 (5,613) 3,688 (5,464) Items not yet recognized in earnings: Unrecognized net asset at transition............... (4,154) (4,366) Unrecognized prior service cost..................... 528 88 562 33 Unrecognized net (gain) loss..................... (18,847) 2,277 (9,308) 2,417 --------- ------- --------- ------- Contribution payable......... $ (8,969) $(3,248) $ (9,424) $(3,014) ========= ======= ========= ======= PLANS FOR PLANS FOR WHICH WHICH ACCUMULATED ACCUMULATED BENEFITS EXCEED BENEFITS EXCEED ASSETS ASSETS --------------- --------------- JUNE 29, 1996 JUNE 29, 1996 --------------- --------------- (AMOUNTS IN THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligations: Vested................... $ (98,543) $(4,615) Nonvested................ (1,937) (136) --------- ------- $(100,480) $(4,751) ========= ======= Plan assets at fair value.... $ 114,508 $ 2,047 Projected benefit obligations................ (117,730) (6,932) --------- ------- Plan assets in excess of (less than) projected benefit obligations........ (3,222) (4,885) Items not yet recognized in earnings: Unrecognized net asset at transition............... (5,207) Unrecognized prior service cost..................... (110) 348 Unrecognized net (gain) loss..................... 2,929 1,417 --------- ------- Contribution payable......... $ (5,610) $(3,120) ========= =======
F-20 60 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company made contributions of approximately $526,000 in the twenty-seven weeks ended January 3, 1998, $371,000 in fiscal 1997, $271,000 in fiscal 1996 and $441,000 in fiscal 1995 to collectively bargained, multiemployer pension plans based on specific rates per hour worked by participating employees. NOTE 9. INCOME TAXES The provision for income taxes consists of the following:
FOR THE 27 WEEKS ENDED FOR THE 52 WEEKS ENDED ----------- ----------------------------- JANUARY 3, JUNE 28, JUNE 29, JULY 1, 1998 1997 1996 1995 ----------- -------- -------- ------- (AMOUNTS IN THOUSANDS) Current taxes: Federal...................................... $5,686 $26,910 $13,915 $21,886 State........................................ 2,395 5,557 2,621 2,723 ------ ------- ------- ------- 8,081 32,467 16,536 24,609 ------ ------- ------- ------- Deferred taxes: Federal...................................... 2,395 1,587 1,636 1,358 State........................................ (319) 347 347 854 ------ ------- ------- ------- 2,076 1,934 1,983 2,212 ------ ------- ------- ------- Benefit of operating loss carryforwards........ (525) (1,210) (334) (1,107) ------ ------- ------- ------- Provision for income taxes..................... $9,632 $33,191 $18,185 $25,714 ====== ======= ======= =======
Deferred tax liabilities (assets) are comprised of the following:
FOR THE 27 FOR THE 52 WEEKS WEEKS ENDED ENDED ----------- ------------------- JANUARY 3, JUNE 28, JUNE 29, 1998 1997 1996 ----------- -------- -------- (AMOUNTS IN THOUSANDS) Depreciation......................................... $ 52,936 $ 51,275 $ 47,999 Other................................................ 13,871 8,673 7,902 -------- -------- -------- Gross deferred tax liabilities..................... 66,807 59,948 55,901 -------- -------- -------- Self-insurance accrual............................... (5,228) (5,274) (5,926) Vacation accrual..................................... (2,080) (2,275) (2,554) Pension accrual...................................... (3,246) (2,481) (2,547) Purchase accounting reserves......................... (13,921) (14,483) -- Loss carryforwards................................... (4,739) (4,117) (3,805) Other................................................ (16,050) (9,093) (7,565) -------- -------- -------- Gross deferred tax assets.......................... (45,264) (37,723) (22,397) Deferred tax assets valuation allowance.............. 2,119 2,240 2,774 -------- -------- -------- $ 23,662 $ 24,465 $ 36,278 ======== ======== ========
The net change in the valuation allowance for deferred tax assets was a decrease of $121,000, related to operating loss carryforwards. F-21 61 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes on income differs from the amount computed by applying the U.S. federal income tax rate (35%) because of the effect of the following items:
FOR THE 27 WEEKS ENDED FOR THE 52 WEEKS ENDED ----------- ----------------------------- JANUARY 3, JUNE 28, JUNE 29, JULY 1, 1998 1997 1996 1995 ----------- -------- -------- ------- (AMOUNTS IN THOUSANDS) Tax at U.S. federal income tax rate............ $8,757 $30,728 $16,919 $23,805 State income taxes, net of U.S. federal income tax benefit.................................. 1,390 3,837 1,929 2,325 Benefit of operating loss carryforwards........ (525) (1,210) (334) (1,107) Other.......................................... 10 (164) (329) 691 ------ ------- ------- ------- Provision for income taxes................... $9,632 $33,191 $18,185 $25,714 ====== ======= ======= =======
The amount of federal operating loss carryforwards generated by certain subsidiaries prior to their acquisition is $2,825,000 with expiration dates through the fiscal year 2009. The use of pre-acquisition operating losses and tax credit carryforwards is subject to limitations imposed by the Internal Revenue Code. The Company does not anticipate that these limitations will affect utilization of the carryforwards prior to their expiration. Various subsidiaries have state operating loss carryforwards of $63,579,000 with expiration dates through the fiscal year 2013. During fiscal 1997, the Internal Revenue Service ("IRS") completed an examination of the Company's federal income tax returns for fiscal years 1993 through 1995. During the examination, the IRS asserted that the Company's independent distributor program generated ordinary income upon the initial sale of the territories. As a result, the Company paid for certain claims by the IRS relating primarily to the Company's independent distributor program. NOTE 10. OTHER EMPLOYEE BENEFIT PLANS Under the Company's Bonus Plan, approved annually by the Compensation Committee, certain key employees may receive bonus compensation based on attainment of specified income goals. Total compensation under the Bonus Plan was approximately $3,405,000, $6,969,000, $877,000 and $6,157,000 for the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The Flowers Industries, Inc. 401(k) Retirement Savings Plan covers substantially all employees who have completed certain service requirements. Generally the cost and contributions for employees who participate in the defined benefit pension plan is 25% of the first $400 contributed by the employee. The costs and contributions for employees who do not participate in the defined benefit pension plan is 2% of compensation and 25% of the employees contributions up to 6% of compensation. During the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995, the total cost and contributions was $646,000, $1,367,000, $1,268,000 and $265,000, respectively. NOTE 11. LEGAL MATTERS AND CONTINGENCIES The Company is engaged in various legal proceedings which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to those proceedings will not be material to the Company's financial position or results of operations. A reserve of $4,935,000 was recorded during fiscal 1996 and paid during fiscal 1997 representing final settlement of certain litigation involving subsidiary operations in Texas. F-22 62 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12. ACQUISITIONS On May 31, 1996, the Company acquired certain assets of Mrs. Smith's, Inc., a manufacturer and marketer of frozen pies, including its brand name and trademarks from the J. M. Smucker Company. Under the terms of the acquisition agreement, Flowers paid $30,000,000, consisting of $15,000,000 in cash at closing and a $15,000,000 note payable. In addition, the Company entered into ten-year leases for the property, plant and equipment used in the business. The acquisition has been accounted for as a purchase, and, accordingly, the results of operations of the acquired business are included in the consolidated statement of income from the date of acquisition. The following unaudited condensed combined pro forma results of operations assume the acquisition occurred as of the beginning of each fiscal year:
FOR THE YEAR ENDED ---------------------------- JUNE 29, 1996 JULY 1, 1995 ------------- ------------ (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Sales....................................................... $1,351,769 $1,249,461 Net income.................................................. 33,056 45,057 Earnings per share -- basic................................. .38 .52 Earnings per share -- diluted............................... .38 .52
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the beginning of the fiscal year, nor are they necessarily indicative of future operating results. In addition, the Company acquired certain other businesses during fiscal 1996, fiscal 1997 and the twenty-seven weeks ended January 3, 1998 which have been accounted for as purchases. These acquisitions are immaterial to the results of operations and financial condition of the Company. During fiscal 1997, the Company recorded $22,653,000, net of tax of $14,483,000, in additional goodwill related to liabilities anticipated to be incurred for planned activities for certain acquisitions made during fiscal 1996 and fiscal 1997. A reserve of $34,953,000 and $35,530,000 relating to these transactions is included in other accrued liabilities at January 3, 1998 and June 28, 1997, respectively. NOTE 13. INVESTMENT IN UNCONSOLIDATED AFFILIATE In January 1996, the Company acquired, for $62,500,000, a 49.6% interest in INFLO Holdings Corporation (INFLO), a newly formed corporation jointly owned by the Company and Artal Luxembourg S.A. On January 26, 1996, INFLO acquired 100% of Keebler Corporation for an aggregate consideration of $454,900,000 from United Biscuits (Holdings) plc. Keebler is the second largest cookie and cracker manufacturer in the United States. The acquisition of Keebler Corporation was financed through the equity of INFLO and bank borrowings. The Company accounts for its investment in INFLO using the equity method of accounting. On June 4, 1996, Keebler Corporation acquired 100% of Sunshine Biscuits from G. F. Industries, Inc. (GFI) for an aggregate purchase price of $171,600,000. The acquisition was funded by Keebler Corporation's working capital, bank financing and the issuance to GFI of $23,600,000 of INFLO common stock and warrants. In fiscal 1996, the Company recognized a pre-tax gain on the shares issued to GFI of $4,111,000. As a result of this transaction, the Company's interest in INFLO was reduced to 45.2%. F-23 63 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Condensed financial information of INFLO is as follows:
APRIL 19, 1997 APRIL 20, 1996 -------------- -------------- (AMOUNTS IN THOUSANDS) Current assets.............................................. $ 332,782 $252,791 Total assets................................................ 1,081,984 867,429 Current liabilities......................................... 347,647 384,635 Total liabilities........................................... 911,997 741,174 Common stockholders' equity................................. 169,987 126,255 Total liabilities and common stockholders' equity........... 1,081,984 867,429
APRIL 21, 1996 -- APRIL 19, 1997 JANUARY 26, 1996 -- APRIL 20, 1996 -------------------------------- ---------------------------------- (AMOUNTS IN THOUSANDS) Sales.......................... $1,907,307 $345,600 Gross profit................... 1,030,539 177,900 Net income..................... 19,411 1,255
On November 20, 1997, INFLO was merged into Keebler Corporation and subsequently changed its name to Keebler Foods Company ("Keebler"). Condensed financial information of Keebler for the period included in the Company's results for the twenty-seven weeks ended January 3, 1998 are as follows:
JANUARY 3, 1998 ---------------------- (AMOUNTS IN THOUSANDS) Current assets.............................................. $ 301,646 Total assets................................................ 1,042,851 Current liabilities......................................... 368,185 Total liabilities........................................... 820,800 Common stockholders' equity................................. 222,051 Total liabilities and common stockholders' equity........... 1,042,851
JUNE 29, 1997 - JANUARY 3, 1998 ------------------------------- (AMOUNTS IN THOUSANDS) Sales................................................. $1,164,224 Gross profit.......................................... 668,529 Net income............................................ 45,372
As presented above, the Company's net income from its investment in Keebler for the twenty-seven weeks ended January 3, 1998, includes twenty-seven weeks of Keebler's operating results. The increase in retained earnings reflected as equity from investment in unconsolidated affiliate of $2,700,000 was necessitated by the Company's change in fiscal year end and represents the elimination of the lag of approximately two months in its recognition of Keebler's results. Currently, Keebler's existing credit agreement places certain restrictions on its ability to pay dividends. As of January 3, 1998, the Company had recognized aggregate equity of $29 million from its investment in Keebler. F-24 64 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14. UNAUDITED QUARTERLY FINANCIAL INFORMATION Results of operations for each of the two quarters of the twenty seven-weeks ended January 3, 1998 and for each of the four quarters of the fiscal years ended June 28, 1997 and June 29, 1996 follow (each quarter represents a period of twelve weeks except the fourth quarter, which includes sixteen weeks and the second quarter of 1998, which includes fifteen weeks):
QUARTER FIRST SECOND THIRD FOURTH ------- --------- --------- --------- --------- 1998 1998 1997 1997 1997 1997 1996 1996 1996 1996 --------- --------- --------- --------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Sales...................................... $308,387 $475,710(1) $ -- $ -- 322,710 381,290 301,392 432,321 269,674 290,538 275,013 403,339 Gross Profit............................... 142,911 222,260(1) -- -- 140,438 164,756 142,278 202,442 125,893 130,676 125,398 181,835 Income before income taxes................. 15,364 9,655(1) -- -- 32,925 19,175 9,912 25,782 12,696 12,749 9,135 13,760 Net (loss) income from investment in unconsolidated affiliate................. 5,157 12,904(1) -- -- (531) 336 6,005 1,911 -- -- -- 613 Net income................................. 14,529 9,031(1) -- -- 19,948 12,263 12,170 17,943 7,897 7,930 5,682 9,259 Basic net income per common share.......... .16 .10(1) -- -- .23 .14 .14 .20 .09 .09 .07 .11 Diluted net income per common share........ .16 .10(1) -- -- .23 .14 .14 .20 .09 .09 .07 .11
- --------------- (1) Amounts relate to a fifteen week period ended January 3, 1998 and, as such, do not correspond to the amounts reported in the Company's Second Quarter Form 10-Q for the twelve week period ended December 13, 1997. F-25 65 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15. NET INCOME PER SHARE Earnings per share is calculated using the weighted average number of common and common equivalent shares outstanding during each period. The common stock equivalents consist of the incremental shares associated with the Company's stock option plans, as determined under the treasury stock method. The following table sets forth the computation of basic and diluted net income per shares:
27 WEEKS 52 WEEKS ENDED ENDED -------------------------------------------- JANUARY 3, 1998 JUNE 28, 1997 JUNE 29, 1996 JULY 1, 1995 --------------- ------------- ------------- ------------ (AMOUNTS IN THOUSANDS) Numerator: Income before cumulative effect of changes in accounting principles, net of tax... $33,448 $62,324 $30,768 $42,301 Cumulative effect of changes in accounting principles, net of tax................. (9,888) ------- ------- ------- ------- Net income................................ $23,560 $62,324 $30,768 $42,301 ======= ======= ======= ======= Denominator: Basic weighted average shares............. 88,368 88,000 86,933 86,229 Effect of dilutive securities: Stock options.......................... 405 401 278 209 ------- ------- ------- ------- Diluted weighted average shares........... 88,773 88,401 87,211 86,438 ======= ======= ======= =======
NOTE 16. UNAUDITED OPERATING RESULTS FOR THE TWENTY-SEVEN WEEKS ENDED JANUARY 4, 1997 The unaudited condensed results of operations for the twenty-seven weeks ended January 4, 1997 are presented below. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the results of operations.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) ----------------------- Sales....................................................... $774,767 Income before income taxes.................................. 50,335 Income taxes................................................ 19,027 Net loss from investment in unconsolidated affiliate........ (195) Net income.................................................. 31,113 Earnings per share -- basic................................. .35 Earnings per share -- diluted............................... .35
F-26 66 FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. SUBSEQUENT EVENT On February 3, 1998, the Company acquired an additional 11.5% of the common stock of Keebler, giving the Company a controlling ownership position in Keebler of approximately 55%. Under the terms of the acquisition agreement, the Company paid $308,624,000 in cash at closing. The acquisition was financed through borrowings under the $500,000,000 syndicated loan facility. The following unaudited condensed combined pro forma results of operations assume the acquisition occurred as of the beginning of each period:
FOR THE FOR THE TWENTY-SEVEN WEEKS FIFTY-TWO WEEKS ENDED ENDED JANUARY 3, 1998 JUNE 28, 1997 ------------------ --------------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Sales....................................................... $1,792,419 $3,421,082 Net income.................................................. 27,915 56,765 Earnings per share -- basic................................. .32 .65 Earnings per share -- diluted............................... .31 .64
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the beginning of the period, nor are they necessarily indicative of future operating results. F-27 67 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Flowers Industries, Inc. Our audits of the consolidated financial statements referred to in our report dated March 23, 1998 of this Transition Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICE WATERHOUSE LLP Atlanta, Georgia March 23, 1998 68 VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE II)
BALANCE AT BALANCE BEGINNING ADDITIONS AT END CLASSIFICATION OF PERIOD AT COST DEDUCTIONS OF PERIOD - -------------- --------- --------- ---------- --------- (AMOUNTS IN THOUSANDS) Twenty-seven Weeks Ended January 3, 1998 Cost in Excess of Net Tangible Assets................. $68,453 $ 7,429 $ (994) $74,888 ======= ======= ======= ======= Year Ended June 28, 1997 Cost in Excess of Net Tangible Assets................. $44,617 $24,977 $(1,141) $68,453 ======= ======= ======= ======= Year Ended June 29, 1996 Cost in Excess of Net Tangible Assets................. $ 9,281 $35,625 $ (289) $44,617 ======= ======= ======= ======= Year Ended July 1, 1995 Cost in Excess of Net Tangible Assets................. $ 9,618 $ 393 $ (730) $ 9,281 ======= ======= ======= =======
See Note 1 of Notes to Consolidated Financial Statements for accounting policy for capitalization and amortization of intangible assets. EX-10.A.2 2 FIRST AMENDMENT TO THE ANNUAL EXECUTIVE BONUS PLAN 1 EXHIBIT 10(a)(2) FIRST AMENDMENT TO THE FLOWERS INDUSTRIES, INC. ANNUAL EXECUTIVE BONUS PLAN THIS AMENDMENT to the Flowers Industries, Inc. Annual Executive Bonus Plan (the "Plan") is made as of the 29th day of June, 1997, to be effective on said date. Pursuant to Section 9 of the Plan, the Compensation Committee hereby amends the Plan as follows, subject to the approval of said amendment by a majority of the Company's shareholders present or represented at the next annual meeting thereof. I. Section 2(c) of the Plan is hereby amended by inserting the following provision before the last sentence thereof: "Notwithstanding the foregoing, the Compensation Committee may determine that a goal other than EPS is appropriate for certain executives whose responsibilities pertain more specifically to discrete elements of the Company's business; in such cases, the Committee may prescribe a goal based on the performance of a product group, division, subsidiary or other management reporting unit, or any combination of the above." II. Section 2(c) of the Plan is further amended by changing the amount "$750,000" to "$1,500,000," in the last line of said section. III. Section 3 of the Plan is amended by deleting the first sentence thereof and replacing it with the following sentence: "The Bonus shall be paid to all Participants no later than 90 days after the close of the Plan Year, in cash, unless the Participant has made a valid election to defer said Bonus pursuant to the terms of any applicable deferred compensation plan maintained by the Company." 2 IV. Section 5 of the Plan is amended by adding the phrase "without approval of the Company's shareholders" to the end of the third sentence of said section. IN WITNESS WHEREOF, the Company has caused the Plan to be amended as provided above. FLOWERS INDUSTRIES, INC. 2 EX-10.E.2 3 SECOND AMENDMENT TO THE EXECUTIVE STOCK PLAN 1 EXHIBIT 10(e)(2) SECOND AMENDMENT TO FLOWERS INDUSTRIES, INC. 1989 EXECUTIVE STOCK INCENTIVE PLAN THIS AMENDMENT, made this 17th day of October, 1997, to the Flowers Industries, Inc. 1989 Executive Stock Incentive Plan, WITNESSETH: WHEREAS, the Company has previously adopted and amended the Flowers Industries, Inc. 1989 Executive Stock Incentive Plan (the "Plan") and, WHEREAS, pursuant to Section 12 of the Plan, the Board of Directors of the Company may amend the provisions of the Plan, subject to the approval of the Company's stockholders in certain circumstances; and WHEREAS, the Company wishes to amend the provisions of the Plan as reflected below, which amendment has been authorized by the Company's Board of Directors and which is further conditioned upon the approval of a majority of the Company's stockholders present and entitled to vote at a meeting duly called and held prior to December 31, 1997; NOW, THEREFORE, the Plan is hereby amended as follows: I. Paragraph 3 of the Plan is hereby amended to read as follows SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 12,050,000 shares, subject to adjustment as hereinafter provided in this Section 3. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. Subject to Section 6(b)(iv) below, if any shares of Stock that have been optioned cease to be subject to a Stock 2 Option, or if any such shares of Stock that are subject to any Restricted Stock or Deferred Stock award, Stock Purchase Right or Other Stock-Based Award granted hereunder are forfeited or any such award otherwise terminates without a payment being made to the participant in the form of Stock, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, Stock split or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, in the number and purchase price of shares subject to outstanding Stock Purchase Rights under the Plan, and in the number of shares subject to other outstanding awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. Subject to adjustment as provided in the preceding paragraph, the aggregate number of shares of Stock actually issued or transferred by the Company upon the exercise of Incentive Stock Options shall not exceed 12,050,000 shares of Stock. Notwithstanding any other provision of this Plan to the contrary, no participant shall be granted stock options or stock appreciation rights with respect to more than 250,000 shares of stock during any fiscal year, subject to adjustment in the manner described above in the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, Stock split or other change in corporate structure affecting the Stock. II. Section 14 of the Plan is hereby amended by adding Section 14(g), which shall read in its entirety as follows: Any award may specify management objectives associated with the award. Any award that specifies management objectives 2 3 shall specify a minimum acceptable level of achievement in respect of the specified management objective below which no payment will be made or no benefit will be conferred. Management objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual participant, product group, division, subsidiary or other management reporting unit in which the participant is employed. The management objectives may be relative to the performance of other companies or entities. If any individual is, or is determined by the Committee to be reasonably likely to become, a covered employee within the meaning of Section 162(m) of the Code, then awards to that individual that specify management objectives shall be based on specified levels of, or growth in, one or more of the following criteria: (i) share price, (ii) earnings, (iii) earnings per share, (iv) revenues, and (v) total stockholder return. Notwithstanding any other provision of this Plan to the contrary, in no event shall any participant be granted, in any period of one fiscal year, awards that specify management objectives having an aggregate value as of their respective dates of grant in excess of $1,500,000. Except as may be permitted under Section 162(m) of the Code, the Committee may not adjust management objectives after the grant of any award that specifies management objectives. III. Paragraph 16 of the Plan is hereby amended to read as follows: SECTION 16. Term of Plan. No Stock Option, Stock Appreciation Right, Restricted Stock award, Deferred Stock award, Stock Purchase Right or Other Stock Based Award shall be granted pursuant to the Plan on or after the tenth anniversary of the date of shareholder approval of the 1997 Amendments to the Plan, but awards granted prior to such tenth anniversary may extend beyond that date. IN WITNESS WHEREOF, the Company has executed this Second Amendment to the Plan, to be effective this 17th day of October, 1997. FLOWERS INDUSTRIES, INC. /s/ 3 EX-10.G 4 NON-EMPLOYEE DIRECTORS EQUITY PLAN 1 EXHIBIT 10(g) FLOWERS INDUSTRIES, INC. NONEMPLOYEE DIRECTORS' EQUITY PLAN 2 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS......................................................... 1 ARTICLE II. PURPOSE............................................................ 2 ARTICLE III. ELECTION TO PARTICIPATE........................................... 2 3.1. Eligibility................................................... 2 3.2. Election to Participate....................................... 2 3.3. Amount of Participation....................................... 3 3.4. Minimum Level of Participation For Investment in Options.................................................... 3 ARTICLE IV. OPTIONS............................................................ 3 4.1. Grant of Options.............................................. 3 4.2. Written Agreement............................................. 3 4.3. Exercisability of Options..................................... 3 4.4. Term.......................................................... 3 4.5. Early Vesting................................................. 3 4.6. Exercise Price................................................ 4 4.7. Payment....................................................... 4 4.8. Option Nontransferable........................................ 4 ARTICLE V. CHANGE IN CONTROL................................................... 4 ARTICLE VI. ADMINISTRATION, AMENDMENT AND TERMINATION.......................... 6 6.1. Administration................................................ 6 6.2. Amendment and Termination..................................... 6 6.3. Amendment of Options.......................................... 6 ARTICLE VII. SHARES SUBJECT TO PLAN............................................ 7 7.1. Shares Subject to Plan........................................ 7 7.2. Adjustments................................................... 7 ARTICLE VIII. GENERAL PROVISIONS............................................... 8 8.1. Governing Law................................................. 8 8.2. Miscellaneous................................................. 8
i 3 FLOWERS INDUSTRIES, INC. NONEMPLOYEE DIRECTORS' EQUITY PLAN The Flowers Industries, Inc. Nonemployee Directors' Equity Plan ("Plan") is effective as of June 29, 1997, subject to approval of shareholders at the 1997 annual meeting. ARTICLE I. DEFINITIONS Whenever the following terms are used in this Plan they shall have the meanings specified below unless the context clearly indicates to the contrary: (a) "Administrator": The Compensation Committee of the Board or any successor committee designated by the Board. (b) "Board": The Board of Directors of the Company. (c) "Change of Control": The meaning set forth in Article V. (d) "Code": The Internal Revenue Code of 1986, as amended. (e) "Company": Flowers Industries, Inc. or any successor or successors thereto. (f) "Director": An individual duly elected or chosen as a Director of the Company who is not also an employee of the Company or any of its subsidiaries. (g) "Fair Market Value": With respect to a Share, as of any given date, unless otherwise determined by the Administrator in good faith, the mean between the highest and lowest quoted selling price, regular way, of a Share on the New York Stock Exchange, or if no such sale of Shares occurs on the New York Stock Exchange on such date, the fair market value of the Shares as determined by the Administrator in good faith. (h) "Option": An option to purchase Shares granted pursuant to Section 4.1. 4 (i) "Participation Agreement": The agreement submitted by a Director to the Administrator in which a Director may specify his or her election to invest all or a portion of his or her Retainer in Options. (j) "Plan": The Plan set forth in this instrument as it may from time to time be amended. (k) "Plan Year": The fiscal year of the Company. (l) "Retainer": The portion of a Director's annual compensation that is payable without regard to number of Board or committee meetings attended or committee positions. (m) "Shares": The Company's fully paid, non-assessable common stock. Shares may be shares of original issuance or treasury shares or a combination of the foregoing. (n) "Valuation Date": The date of the meeting of the Compensation Committee of the Board first preceding the first day of a Plan Year. ARTICLE II. PURPOSE The purpose of this Plan is to provide Directors with opportunities to invest amounts of their Retainer in Options in order to further align the interests of Directors with the shareholders of the Company and thereby promote the long-term success and growth of the Company. ARTICLE III. ELECTION TO PARTICIPATE 3.1. Eligibility. All individuals who are Directors as of the first day of a Plan Year may participate in the Plan for such Plan Year. A Director may elect to participate for any Plan Year in accordance with Section 3.2 of this Article. A Director's entitlement to participate as to future investments shall cease with respect to the Plan Year following the Plan Year in which he or she ceases to be a Director. 3.2. Election to Participate. A Director who desires to participate in this Plan with respect to the Retainer payable 2 5 for such Plan Year must complete and deliver a Participation Agreement to the Administrator before the first day of the Plan Year for which such Retainer would otherwise be paid. A Participation Agreement that is timely delivered shall be effective for the succeeding Plan Year and in addition, except as otherwise specified by a Director in his or her Participation Agreement, shall continue to be effective from Plan Year to Plan Year until revoked or modified by written notice to the Administrator or until terminated automatically upon the termination of the Plan. In order to be effective to revoke or modify a Participation Agreement with respect to the Retainer for a Plan Year, a revocation or modification must be delivered prior to the first day of the Plan Year for which such Retainer is payable. 3.3. Amount of Participation. A Director shall designate on the Participation Agreement the dollar amount of his or her Retainer that he or she has elected to invest in Options under this Plan. 3.4. Minimum Level of Participation For Investment in Options. A Director shall be permitted to invest in Options under this Plan only if for the Plan Year involved the total amount of the Retainer for the Director that is invested in Options for the Plan Year equals at least twenty-five (25) percent of the Retainer of the Director for such Plan Year. ARTICLE IV. OPTIONS 4.1. Grant of Options. To the extent a Director elects to invest all or a portion of his or her Retainer for a Plan Year in Options, an Option shall be granted on the first day of such Plan Year for that number of Shares equal to 150% of the amount of the Retainer invested divided by the value of an Option for one Share on the Valuation Date. For this purpose, value shall be determined by the Black-Scholes option pricing model, as applied by the Administrator. To the extent that the application of the foregoing formula would result in an Option covering a fractional Share, the number of Shares covered by the Option shall be rounded up. 4.2. Written Agreement. Each grant of Options shall be evidenced by a written agreement in such form as approved by 3 6 the Administrator and shall be subject to the additional terms and conditions set forth in this Article IV. 4.3. Exercisability of Options. Subject to the expiration or earlier termination of the Option, 100% of the Option shall become exercisable on the first anniversary of the date of grant. 4.4. Term. An Option shall expire ten years from the date the Option is granted and shall be subject to earlier termination as hereinafter provided. Once an Option becomes exercisable, it may thereafter be exercised, wholly or in part, at any time prior to its expiration or termination. In the event of the Director's termination from service on the Board, other than as provided in Section 4.5, an outstanding Option may be exercised only to the extent it was exercisable on the date of such termination and shall expire two years after such termination, or on its stated expiration date, whichever occurs first. Notwithstanding the above, in the event of a termination for cause as determined by the Administrator, all unexercised Options shall be forfeited. 4.5. Early Vesting. Upon the occurrence of any of the following events, the Option shall become immediately and fully exercisable: the death of the Director, the disability of the Director, or a Change in Control. The Option shall expire two years after such event, or on its stated expiration date, whichever occurs first. 4.6. Exercise Price. The exercise price of an Option granted to a Director shall be equal to the Fair Market Value per Share on the date of grant. 4.7. Payment. An Option may be exercised by a Director only upon payment to the Company in full of the exercise price of the Option corresponding to the portion of the Option to be exercised. Such payment shall be made in cash or in Shares previously owned by the Director for more than six months, or in a combination of cash and such Shares. 4.8. Option Nontransferable. Unless otherwise determined by the Administrator, the Option shall be neither transferable nor assignable by the Director other than by will or by the laws of descent and distribution and may be exercised, during the lifetime of the Director, only by the Director, or in the event of his or her legal incapacity, by his or her guardian or legal representative acting on behalf of the Director in a fiduciary capacity under the state law and court supervision. 4 7 ARTICLE V. CHANGE IN CONTROL For purposes of this Plan, a "Change in Control" means the first to occur of the following events: (1) The Company enters into an agreement which provides for the Company becoming a subsidiary of another corporation or entity or being merged with or consolidated into another corporation or entity (other than a corporation wholly owned by the Company) or the sale of substantially all of the assets of the Company to another corporation or entity; (2) Any person, corporation, partnership or other entity, either alone or in conjunction with its "affiliates" as that term is defined in Rule 405 of the General Rules and Regulations under the Securities Act of 1933, as amended (the "Act"), or any other group of persons, corporations, partnerships or other entities who are not "affiliates" as defined but who are acting in concert, are determined to own of record or beneficially securities of the Company which represent twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities entitled to vote for the election of Directors, if such ownership was not approved in advance by a vote of at least three-quarters of the Continuing Directors as defined below; provided, however, that for purposes of determining the ownership of any group as described above or any member thereof, no such group or member shall be deemed to be the beneficial owner of Shares: a. which were beneficially owned by a member on March 17, 1989 and continue to be beneficially owned by any member or any affiliate or associate thereof as of the date of the formation of the group; 5 8 b. initially acquired by a member or an affiliate or associate thereof after March 17, 1989 by bona fide gift, inheritance, or as a result of a stock dividend, split or in a similar transaction in which no consideration was exchanged; c. initially acquired by a member or an affiliate or associate thereof after March 17, 1989 pursuant to the exercise of any options, rights or warrants granted to such person by the Company; or d. beneficially owned by a member or an affiliate or associate thereof pursuant to any employee benefit plan of the Company or any subsidiary of the Company. (3) The first to occur of (x) the Board's actual knowledge of, or (y) the reporting to the Commission of, the tender, pursuant to a tender offer or exchange offer other than by the Company, of shares representing twenty-five percent (25%) or more of the Company's then outstanding securities entitled to vote for the election of Directors, whether or not such percentage of tendered securities is subsequently reduced; (4) The Board adopts a resolution approving the liquidation or dissolution of the Company; (5) Continuing Directors at any time fail to constitute a majority of the Board, and the term "Continuing Directors" shall mean the then current members of the Board who were also members of the Board on December 7, 1987, plus any new directors whose nominations were approved by at least three-quarters of the Continuing Directors in office at the time of the election of any such new directors, other than a nomination of an individual whose initial assumption of office is in connection with an actual or threatened solicitation with respect to the "election or removal of the Board of Directors," as such terms are used in Rule 14a-11 of the Exchange Act; or (6) Any other event that a majority of the Continuing Directors determines would be required to be reported in response to Item 6(e) [Voting Securities and Principal Holders Thereof - change in control] of Schedule 14A of Regulation 14A promulgated under Exchange Act, or any successor provision thereof. 6 9 ARTICLE VI. ADMINISTRATION, AMENDMENT AND TERMINATION 6.1. Administration. The Plan shall be administered by the Administrator. The Administrator shall have such powers as may be necessary to discharge its duties hereunder. The Administrator may, from time to time, employ, appoint or delegate to an agent or agents (who may be an officer or officers of the Company) and delegate to them such administrative duties as it sees fit, and may from time to time consult with legal counsel who may be counsel to the Company. The Administrator shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided under the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. No member of the Administrator shall act in respect of his or her own Retainer. All decisions and determinations by the Administrator shall be final and binding on all parties. No member of the Administrator shall be liable for any such action taken or determination made in good faith. All decisions of the Administrator shall be made by the vote of the majority, including actions and writing taken without a meeting. All elections, notices and directions under the Plan by a Director shall be made on such forms as the Administrator shall prescribe. 6.2. Amendment and Termination. The Board may alter or amend this Plan from time to time or may terminate it in its entirety; provided, however, that no such action, except for an acceleration of benefits, shall, without the consent of a Director, impair the rights in any Shares issued or to be issued to such Director, as a result of a grant of Options under the Plan; and further provided, that any amendment that must be approved by the shareholders of the Company in order to comply with applicable law or the rules of the principal national securities exchange upon which the Shares are traded or quoted shall not be effective unless and until such approval has been obtained in compliance with such applicable law or rules. Presentation of this Plan or any amendment hereof for shareholder approval shall not be construed to limit the Company's authority to offer similar or dissimilar benefits through plans that are not subject to shareholder approval. 7 10 6.3. Amendment of Options. The Administrator shall not, without the further approval of the shareholders of the Company, authorize the amendment of any outstanding Option to reduce the exercise price of the Option. Furthermore, no Option shall be cancelled and replaced with awards having a lower exercise price without further approval of the shareholders of the Company. This Section 6.3 is intended to prohibit the repricing of "underwater" Options and shall not be construed to prohibit the adjustments provided for in Section 7.2 of this Plan. ARTICLE VII. SHARES SUBJECT TO PLAN 7.1. Shares Subject to Plan. Subject to adjustment as provided in this Plan, the total number of Shares which may be issued under this Plan shall be three hundred thousand (300,000). 7.2. Adjustments. The Administrator may make or provide for such adjustments in the (a) number of Shares covered by outstanding Options granted or awarded hereunder, (b) prices per share applicable to such Options, and (c) kind of shares covered thereby, as the Administrator in its sole discretion may in good faith determine to be equitably required in order to prevent dilution or enlargement of the rights of Directors that otherwise would result from (x) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (y) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation of the Company or other distribution of assets, issuance of rights or warrants to purchase securities of the Company, or (z) any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Administrator may provide in substitution for any or all outstanding grants or awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all awards so replaced. Moreover, the Administrator may on or after the date of grant provide in the agreement evidencing any grant or award under this Plan that the holder of the grant or award may elect to receive an equivalent grant or award in respect of securities of the 8 11 surviving entity of any merger, consolidation or other transaction or event having a similar effect, or the Administrator may provide that the holder will automatically be entitled to receive such an equivalent grant or award. The Administrator may also make or provide for such adjustments in the number of shares specified in Section 7.1 of this Plan as the Administrator in its sole discretion may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 7.2. This Section 7.2 shall not be construed to permit the re-pricing of any Options in the absence of any of the circumstances described above in contravention of Section 6.3 of this Plan. ARTICLE VIII. GENERAL PROVISIONS 8.1. Governing Law. The provisions of this Plan shall be governed by and construed in accordance with the laws of the State of Georgia. 8.2. Miscellaneous. Headings are given to the sections of this Plan solely as a convenience to facilitate reference. Such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of this Plan or any provisions thereof. The use of the singular shall also include within its meaning the plural, and vice versa. 9 EX-10.H 5 NOTE PURCHASE AGREEMENT 1 EXHIBIT 10(h) ================================================================================ FLOWERS INDUSTRIES, INC. $100,000,000 6.80% Senior Notes due January 5, 2008 $20,000,000 6.99% Senior Notes due January 5, 2011 $5,000,000 7.08% Senior Notes due January 5, 2016 --------- NOTE PURCHASE AGREEMENT --------- Dated December 20, 1995 ================================================================================ 2 TABLE OF CONTENTS
Section Page - ------- ---- 1. AUTHORIZATION OF NOTES................................................................................. 1 2. SALE AND PURCHASE OF NOTES............................................................................. 2 3. CLOSING................................................................................................ 2 4. CONDITIONS TO CLOSING.................................................................................. 2 4.1. Representations and Warranties.............................................................. 2 4.2. Performance; No Default..................................................................... 3 4.3. Compliance Certificates..................................................................... 3 4.4. Opinions of Counsel......................................................................... 3 4.5. Purchase Permitted By Applicable Law, etc................................................... 3 4.6. Sale of Other Notes......................................................................... 4 4.7. Payment of Special Counsel Fees............................................................. 4 4.8. Private Placement Number.................................................................... 4 4.9. Changes in Corporate Structure.............................................................. 4 4.10. Proceedings and Documents................................................................... 4 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................... 4 5.1. Organization; Power and Authority........................................................... 5 5.2. Authorization, etc.......................................................................... 5 5.3. Disclosure.................................................................................. 5 5.4. Organization and Ownership of Shares of Subsidiaries........................................ 5 5.5. Financial Statements........................................................................ 6 5.6. Compliance with Laws, Other Instruments, etc................................................ 6 5.7. Governmental Authorizations, etc............................................................ 6 5.8. Litigation; Observance of Statutes and Orders............................................... 7 5.9. Taxes....................................................................................... 7 5.10. Title to Property; Leases................................................................... 7 5.11. Licenses, Permits, etc...................................................................... 7 5.12. Compliance with ERISA....................................................................... 8 5.13. Private Offering by the Company............................................................. 8 5.14. Use of Proceeds; Margin Regulations......................................................... 9 5.15. Existing Indebtedness....................................................................... 9 5.16. Foreign Assets Control Regulations, etc..................................................... 9 5.17. Status under Certain Statutes............................................................... 10 5.18. Restrictive Agreements...................................................................... 10
3 6. REPRESENTATIONS OF THE PURCHASER....................................................................... 10 6.1. Purchase for Investment..................................................................... 10 6.2. Source of Funds............................................................................. 10 7. INFORMATION AS TO COMPANY.............................................................................. 12 7.1. Financial and Business Information.......................................................... 12 7.2. Officer's Certificate....................................................................... 15 7.3. Inspection.................................................................................. 15 8. PREPAYMENT OF THE NOTES................................................................................ 16 8.1. Required Prepayments........................................................................ 16 8.2. Optional Prepayments with Make-Whole Amount................................................. 16 8.3. Allocation of Partial Prepayments........................................................... 17 8.4. Maturity; Surrender, etc.................................................................... 17 8.5. Purchase of Notes........................................................................... 17 8.6. Make-Whole Amount........................................................................... 17 9. AFFIRMATIVE COVENANTS.................................................................................. 19 9.1. Compliance with Law......................................................................... 19 9.2. Insurance................................................................................... 19 9.3. Maintenance of Properties................................................................... 19 9.4. Payment of Taxes............................................................................ 20 9.5. Corporate Existence, etc.................................................................... 20 10. NEGATIVE COVENANTS..................................................................................... 20 10.1. Transactions with Affiliates................................................................ 20 10.2. Merger, Consolidation, etc.................................................................. 20 10.3. Consolidated Total Debt..................................................................... 21 10.4. Restricted Payments......................................................................... 21 10.5. Subsidiary Borrowings....................................................................... 21 10.6. Mortgages and Liens......................................................................... 22 10.7. Sale of Assets.............................................................................. 23 10.8. Nature of Business.......................................................................... 23 10.9 Restrictive Agreements...................................................................... 23 11. EVENTS OF DEFAULT...................................................................................... 24 12. REMEDIES ON DEFAULT, ETC............................................................................... 26 12.1. Acceleration................................................................................ 26 12.2. Other Remedies.............................................................................. 26 12.3. Rescission.................................................................................. 27 12.4. No Waivers or Election of Remedies, Expenses, etc........................................... 27
4 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.......................................................... 27 13.1. Registration of Notes....................................................................... 27 13.2. Transfer and Exchange of Notes.............................................................. 28 13.3. Replacement of Notes........................................................................ 28 14. PAYMENTS ON NOTES...................................................................................... 29 14.1. Place of Payment............................................................................ 29 14.2. Home Office Payment......................................................................... 29 15. EXPENSES, ETC.......................................................................................... 29 15.1. Transaction Expenses........................................................................ 29 15.2. Survival.................................................................................... 30 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.............................................................................................. 30 17. AMENDMENT AND WAIVER................................................................................... 30 17.1. Requirements................................................................................ 30 17.2. Solicitation of Holders of Notes............................................................ 30 17.3. Binding Effect, etc......................................................................... 31 17.4. Notes held by Company, etc.................................................................. 31 18. NOTICES................................................................................................ 31 19. REPRODUCTION OF DOCUMENTS.............................................................................. 32 20. CONFIDENTIAL INFORMATION............................................................................... 32 21. SUBSTITUTION OF PURCHASER.............................................................................. 33 22. MISCELLANEOUS.......................................................................................... 34 22.1. Successors and Assigns...................................................................... 34 22.2. Payments Due on Non-Business Days........................................................... 34 22.3. Severability................................................................................ 34 22.4. Construction................................................................................ 34 22.5. Counterparts................................................................................ 34 22.6. Governing Law............................................................................... 35
SCHEDULE A -- INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008 SCHEDULE B -- INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2011 5 SCHEDULE C -- INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2016 SCHEDULE D -- DEFINED TERMS SCHEDULE 4.9 -- Changes in Corporate Structure SCHEDULE 5.3 -- Disclosure Materials SCHEDULE 5.4 -- Subsidiaries of the Company and Ownership of Subsidiary Stock SCHEDULE 5.5 -- Financial Statements SCHEDULE 5.8 -- Certain Litigation SCHEDULE 5.11 -- Patents, etc. SCHEDULE 5.14 -- Use of Proceeds SCHEDULE 5.15 -- Existing Indebtedness EXHIBIT 1(A) -- Form of 6.80% Senior Note due January 5, 2008 EXHIBIT 1(B) -- Form of 6.99% Senior Note due January 5, 2011 EXHIBIT 1(C) -- Form of 7.08% Senior Note due January 5, 2016 EXHIBIT 4.4(a) -- Form of Opinion of General Counsel of the Company EXHIBIT 4.4(b) -- Form of Opinion of Special Counsel to the Company EXHIBIT 4.4(c) -- Form of Opinion of Special Counsel for the Purchasers 6 6.80% Senior Notes due January 5, 2008 6.99% Senior Notes due January 5, 2011 7.08% Senior Notes due January 5, 2016 December 20, 1995 TO EACH OF THE PURCHASERS LISTED IN THE ATTACHED SCHEDULE A, SCHEDULE B AND SCHEDULE C: Ladies and Gentlemen: FLOWERS INDUSTRIES, INC., a Georgia corporation (the "COMPANY"), agrees with you as follows: 1. AUTHORIZATION OF NOTES. The Company will authorize the issue and sale of $100,000,000 aggregate principal amount of its 6.80% Senior Notes due January 5, 2008, $20,000,000 aggregate principal amount of its 6.99% Senior Notes due January 5, 2011 and $5,000,000 aggregate principal amount of its 7.08% Senior Notes due January 5, 2016 (collectively, the "NOTES", such term to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement). The Notes shall be substantially in the form set out in Exhibits 1(A), 1(B) and 1(C), with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule D; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. 7 2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and each of the other purchasers named in Schedule A, Schedule B and Schedule C (the "OTHER PURCHASERS") and you and the Other Purchasers will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount specified opposite your name and the names of the respective Other Purchasers in Schedule A, Schedule B and/or Schedule C at the purchase price of 100% of the principal amount thereof. The obligations of you and the Other Purchasers hereunder are several and not joint obligations and you shall have no obligation and no liability to any Person for the performance or non-performance by any Other Purchaser hereunder. 3. CLOSING. The sale and purchase of the Notes to be purchased by you and the Other Purchasers shall occur at the offices of Jones, Day, Reavis & Pogue, 3500 SunTrust Plaza, 303 Peachtree Street, N.E., Atlanta, Georgia 30308, at 10:00 a.m., Eastern Standard Time, at a closing on either December 20, 1995 or January 5, 1996 as specified opposite your name and the name of each Other Purchaser in Schedule A, Schedule B and Schedule C (as so set forth with respect to each Note Purchaser, the "Closing"). At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $500,000 as you may request) dated the date of the Closing and regis tered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 6890-066623 at Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, ABA Routing #0531-0049-4, for further credit to Flowers Industries, Inc., Attn: Gay Winters. If at the Closing the Company shall fail to tender such Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. CONDITIONS TO CLOSING. Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 4.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. 2 8 4.2. PERFORMANCE; NO DEFAULT. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Schedule 5.14) no Default or Event of Default shall have occurred and be continuing. 4.3. COMPLIANCE CERTIFICATES. (a) Officer's Certificate. The Company shall have delivered to you an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2, 4.7, 4.8 and 4.9 have been fulfilled and certifying as to the sale of the Notes pursuant to Section 4.6 which on or prior to such date have been sold by the Company pursuant to the terms hereof. (b) Secretary's Certificate. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes and the Agreements. 4.4. OPINIONS OF COUNSEL. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Stephen R. Avera, Assistant General Counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request; (b) from Jones, Day, Reavis & Pogue, special counsel to the Company, covering the matters set forth in Exhibit 4.4(b) (and the Company hereby instructs its counsel to deliver such opinion to you); and (c) from Alston & Bird, your special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(c) and covering such other matters incident to such transactions as you may reasonably request. 4.5. PURCHASE PERMITTED BY APPLICABLE LAW, ETC. On the date of the Closing your purchase of Notes shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insur ance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation G, T or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. 3 9 4.6. SALE OF OTHER NOTES. The Company shall sell to the Other Purchasers and the Other Purchasers shall purchase the Notes to be purchased by them at the Closing as specified in Schedule A, Schedule B and Schedule C. 4.7. PAYMENT OF SPECIAL COUNSEL FEES. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing the reasonable fees, charges and disbursements actually incurred by you in relation to your special counsel referred to in Section 4.4, to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. 4.8. PRIVATE PLACEMENT NUMBER. A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. 4.9. CHANGES IN CORPORATE STRUCTURE. Except as specified in Schedule 4.9, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. 4.10. PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to you that: 4 10 5.1. ORGANIZATION; POWER AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it pur ports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof. 5.2. AUTHORIZATION, ETC. This Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.3. DISCLOSURE. The Company, through its agent, SunTrust Capital Markets, has delivered to you and each Other Purchaser a copy of a Private Placement Offering Memorandum, dated November 6, 1995, (the "MEMORANDUM"), relating to the transactions contemplated hereby. Except as dis closed in Schedule 5.3, this Agreement, the Memorandum, the documents, certificates or other writings identified in Schedule 5.3 and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum or as expressly described in Schedule 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since July 1, 1995, there has been no change in the financial condition, operations, business or properties of the Company or any of its Subsidiaries except changes that individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. 5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES. (a) Schedule 5.4 is (except as noted therein) a complete and correct list of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary. 5 11 (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Sub sidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4). (c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Sub sidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. 5.5. FINANCIAL STATEMENTS. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). 5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. The execution, delivery and performance by the Company of this Agreement and the Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other Material agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. 5.7. GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes. 6 12 5.8. LITIGATION; OBSERVANCE OF STATUTES AND ORDERS. (a) Except as disclosed in Schedule 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in default under any order, judg ment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. 5.9. TAXES. The Company and its Subsidiaries have filed all income tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by them, to the extent such taxes and assess ments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended June 30, 1990. 5.10. TITLE TO PROPERTY; LEASES. The Company and its Subsidiaries have good and sufficient title to their respective Material properties, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement, except for those defects in title and Liens that, individually or in the aggregate, would not have a Material Adverse Effect. All Material leases are valid and subsisting and are in full force and effect in all material respects. 5.11. LICENSES, PERMITS, ETC. Except as disclosed in Schedule 5.11, the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that are Material, without known conflict with the rights of others, except for those conflicts that, individually or in the aggregate, would not have a Material Adverse Effect. 7 13 5.12. COMPLIANCE WITH ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA) which remains unpaid as of the date of this Agreement, and no event, transaction or condition has occurred or exists that would reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by more than $600,000 in the case of any single Plan and by more than $1,000,000 in the aggregate for all Plans. The term "BENEFIT LIABILITIES" has the meaning specified in section 4001 of ERISA and the terms "CURRENT VALUE" and "PRESENT VALUE" have the meaning specified in section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected postretirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)- (D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of your representation in Section 6.2 as to the sources of the funds to be used to pay the purchase price of the Notes to be purchased by you. 5.13. PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise 8 14 approached or negotiated in respect thereof with, any person other than you, the Other Purchasers and not more than 50 other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. 5.14. USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 CFR 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 3% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 3% of the value of such assets. As used in this Section, the terms "MARGIN STOCK" and "PURPOSE OF BUYING OR CARRYING" shall have the meanings assigned to them in said Regulation G. 5.15. EXISTING INDEBTEDNESS. Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of September 23, 1995, and all outstanding Indebtedness in excess of $1,000,000 in the aggregate, of the Company and its Subsidiaries incurred from September 23, 1995 to the date hereof, excluding any Indebtedness relating to borrowings or re-borrowings under any revolving line of credit disclosed on Schedule 5.15. Since September 23, 1995 there has been no Material change in the amounts, interest rates, sinking funds, instalment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary, and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary the outstanding principal amount of which exceeds $2,000,000 that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. 5.16. FOREIGN ASSETS CONTROL REGULATIONS, ETC. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. 9 15 5.17. STATUS UNDER CERTAIN STATUTES. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. 5.18. RESTRICTIVE AGREEMENTS. The Company is not a party to any agreement, indenture, lease or other document or instrument which, in any way, prohibits or restricts the right or ability of the Company to amend, supplement or otherwise modify the terms and provisions of this Agreement or any of the Notes. 6. REPRESENTATIONS OF THE PURCHASER. 6.1. PURCHASE FOR INVESTMENT. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provi sions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. 6.2. SOURCE OF FUNDS. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) if you are an insurance company and if the Source includes assets allocated to any separate account maintained by you, the Source does not include assets allocated to any separate account maintained by you in which any employee benefit plan (or its related trust) has any interest, other than a separate account that is maintained solely in connection with your fixed contractual obligations under which the amounts payable, or credited, to such plan and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account; or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of Prohibited Transaction Exemption ("PTE") 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this 10 16 paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such in vestment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA; or (g) the Source consists of funds from your "insurance company general account" as defined in Department of Labor Prohibited Transaction Exemption 95-60 (60 FR 35925, July 12, 1995) provided that there is no "employee benefit plan" (as defined in Section 3(3) of ERISA and Section 4975(e)(1) of the Code, treating as a single plan all plans maintained by the same employer or employee organization) with respect to which the amount of the general account reserves and liabilities of all contracts held by or on behalf of such plan exceed ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the National Association of Insurance Commissioners Annual Statement filed with your state of domicile, provided further that you are relying on the Company's representations set forth in Section 5.12(e) above in making such representation. As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL PLAN", "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 11 17 7. INFORMATION AS TO COMPANY. 7.1. FINANCIAL AND BUSINESS INFORMATION. The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) Quarterly Statements -- within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a); (b) Annual Statements -- within 105 days after the end of each fiscal year of the Company, duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis 12 18 for such opinion in the circumstances, provided that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(b); (c) SEC and Other Reports -- promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (other than registration statements on Form S-8 or its equivalent) that shall have become effective (without exhibits except as expressly requested by such holder), and each final prospectus and all amendments thereto (other than in connection with any employee benefit plan) filed by the Company or any Subsidiary with the Securities and Exchange Commission; (d) Notice of Default or Event of Default -- promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA Matters -- promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in sec tion 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or (ii) the taking by the PBGC of steps to institute, or the receipt of written notice by the PBGC of its intention to institute proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, would reasonably be expected to have a Material Adverse Effect; and 13 19 (f) Requested Information -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes. (g) Promptly after obtaining knowledge of any of the following, the Company will provide each Purchaser with written notice in reasonable detail of: (i) any pending or threatened action against the Company or any of its Subsidiaries or any real property owned or operated by the Company or any of its Subsidiaries under any Environmental Law, if such pending or threatened action would result in a Material Adverse Effect; (ii) any condition or occurrence on any real property owned or operated by the Company or any of its Subsidiaries that (x) results in noncompliance by the Company or any of its Subsidiaries with any Environmental Law or (y) could reasonably be anticipated to form the basis of a claim under any Environmental Law against the Company or any of its Subsidiaries or any such real property, if such condition or occurrence results in a Material Adverse Effect; (iii) any condition or occurrence on any real property owned or operated by the Company or any of its Subsidiaries that could reasonably be anticipated to cause such real property to be subject to any restrictions on the ownership, occupancy, use or transferability by the Company or its Subsidiary, as the case may be, of its interest in such real property under any Environmental Law, if such condition or occurrence results in a Material Adverse Effect; and (iv) the taking of any removal or remedial action in response to the actual or alleged presence of any Hazardous Material on any real property owned or operated by the Company or any of its Subsidiaries, if such taking results in a Material Adverse Effect. (h) The Company will promptly (and in any event within five Business Day's after a Responsible Officer has knowledge thereof) give notice to each Purchaser of: (i) any Material litigation or any proceeding before or by a Government Authority of the type described in Section 5.8; and (ii) any circumstance that has had or reasonably threatens a Material Adverse Effect; provided however, that in the case of both (i) and (ii) above such litigation or proceeding or circumstance shall have been reasonably determined by the Company in and of itself to require public disclosure. 14 20 7.2. OFFICER'S CERTIFICATE. Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) Covenant Compliance -- (i) the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.3 through Section 10.5, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); (ii) a statement that the Company was in compliance with the requirements of Sections 10.6 and 10.7 during the quarterly or annual period covered by the statements then being furnished; and (iii) information relating to any sale, lease, transfer or other disposition of assets covered by the provisions of Section 10.7 hereof but only if such transaction requires the filing of Form 8-K with the Securities and Exchange Commission and in that case sending the holders of the Notes a copy of such Form 8-K contemporaneously with filing shall be deemed satisfactory notice as to Section 10.7; and (b) Event of Default -- a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. 7.3. INSPECTION. The Company shall permit the representatives of each holder of Notes that is an Institutional Investor: (a) No Default -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and, with the consent of the Company (which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and 15 21 (b) Default -- if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. 8. PREPAYMENT OF THE NOTES. 8.1. REQUIRED PREPAYMENTS. (a) On January 5, 2004 and on each July 5 and January 5 thereafter to and including July 5, 2007, the Company will prepay $11,111,100 principal amount of the Notes due January 5, 2008, and on January 5, 2008 shall make a final payment of the total amount then outstanding; (b) on January 5, 2011, the Company will pay $20,000,000 of principal amount of the Notes due on such maturity date (or such lesser principal amount as shall then be outstanding); and (c) on January 5, 2016, the Company will pay $5,000,000 of principal amount of the Notes due on such maturity date (or such lesser principal amount as shall then be outstanding), each at par and without payment of the Make-Whole Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 or purchase of the Notes permitted by Section 8.5, the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment or purchase shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of such prepayment or purchase. 8.2. OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $5,000,000, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment which date shall be a Business Day. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be due and payable on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. 16 22 8.3. ALLOCATION OF PARTIAL PREPAYMENTS. In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. 8.4. MATURITY; SURRENDER, ETC. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount to be prepaid on each Note shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 8.5. PURCHASE OF NOTES. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to an offer to purchase made by the Company or an Affiliate pro rata to the holders of all Notes at the time outstanding upon the same terms and conditions. Any such offer shall provide each holder with sufficient information to enable it to make an informed decision with respect to such offer, and shall remain open for at least 30 Business Days. If the holders of more than 66 2/3% of the principal amount of the Notes then outstanding accept such offer, the Company shall promptly notify the remaining holders of such fact and the expiration date for the acceptance by holders of Notes of such offer shall be extended by the number of days necessary to give each such remaining holder at least 15 Business Days from its receipt of such notice to accept such offer. At the expiration of such period, any holder not accepting such offer shall retain all Notes then held by it, and the terms of such retained Notes, including the scheduled amortization thereof, shall be unaffected by the declined offer. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. 8.6. MAKE-WHOLE AMOUNT. The term "MAKE-WHOLE AMOUNT" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: 17 23 "CALLED PRINCIPAL" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. "DISCOUNTED VALUE" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" means, with respect to the Called Principal of any Note, 0.5% over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Access Service (or such other display as may replace Page 678 on Telerate Access Service) for ac tively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, with respect to (i) or (ii), as the case may be, by (a) converting U.S. Treasury bill quotations to bond-equiva lent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Average Life. "REMAINING AVERAGE LIFE" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced 18 24 by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1. "SETTLEMENT DATE" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. 9. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 9.1. COMPLIANCE WITH LAW. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certifi cates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. 9.2. INSURANCE. The Company will and will cause each of its Subsidiaries to maintain insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. 9.3. MAINTENANCE OF PROPERTIES. The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance would not, individually or in the aggregate, have a Material Adverse Effect. 19 25 9.4. PAYMENT OF TAXES. The Company will and will cause each of its Subsidiaries to file all income tax or similar tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies payable by any of them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, provided that neither the Company nor any Subsidiary need pay any such tax or assessment if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accor dance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes and assessments in the aggregate would not reasonably be expected to have a Material Adverse Effect. 9.5. CORPORATE EXISTENCE, ETC. The Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Sections 10.2 and 10.7, the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged into the Company or a Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise would not, individually or in the aggregate, have a Material Adverse Effect. 10. NEGATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 10.1. TRANSACTIONS WITH AFFILIATES. The Company will not and will not permit any Subsidiary to enter into directly or indirectly any Material transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate. 10.2. MERGER, CONSOLIDATION, ETC. The Company shall not consolidate with or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person unless: 20 26 (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Company is not such successor corporation, (i) the Board of Directors of the Company shall have approved such consolidation, merger, conveyance, transfer or lease, and (ii) such corporation shall have executed and delivered to each holder of any Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement, and the Notes; and (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 10.2 from its liability under this Agreement or the Notes. This Section 10.2 shall not in any way be deemed to apply to any consolidation or merger, or conveyance, transfer or lease of substantially all the assets of, any Subsidiary of the Company with or into the Company (providing the Company is the survivor of such consolidation or merger, or the grantee or lessee of such conveyance, transfer or lease) or any other Subsidiary of the Company. 10.3. CONSOLIDATED TOTAL DEBT. The Company shall not allow at any time Consolidated Total Debt to exceed 65% of Total Capitalization. 10.4. RESTRICTED PAYMENTS. The Company shall not and shall not permit any Subsidiary to make a Restricted Payment unless the aggregate amount of such payments made after July 1, 1995 would not exceed the sum of (i) $140,000,000 plus (ii) 75% of cumulative Consolidated Net Income since July 1, 1995 (less 100% of Consolidated Net Income for such period if Consolidated Net Income is a loss) plus (iii) the net cash proceeds received by the Company from the issuance or sale of capital stock other than redeemable capital stock after the closing date and provided that no Default or Event of Default currently exists or no such payment would trigger a Default or Event of Default. 10.5. SUBSIDIARY BORROWINGS. The Company shall not permit any Subsidiary to become liable for any Indebtedness, whether secured or unsecured, except (a) such of the foregoing as is owed to the Company or another wholly-owned Subsidiary, (b) Indebtedness or obligations secured by Liens permitted by Section 10.6 hereof, (c) Indebtedness or obligations of a Subsidiary outstanding at the time such Subsidiary becomes a Subsidiary, provided that (i) such Indebtedness shall not have been incurred in contemplation of such Subsidiary becoming a Subsidiary, and (ii) immediately 21 27 after such Subsidiary becomes a Subsidiary, no Default or Event of Default shall exist, and provided further that such Indebtedness may not be extended, renewed, or refunded except as otherwise permitted by this Agreement, and (d) other Indebtedness not to exceed, when combined with the total of the Indebtedness secured by all Liens permitted by Section 10.6(j), without duplication, 30% of Consolidated Net Worth. 10.6. MORTGAGES AND LIENS. The Company shall not, without equally and ratably securing the Notes thereby, and shall not permit any Subsidiary to, create, assume or incur any Lien, except for: (a) Liens existing as of the date hereof and listed on Schedule 10.6; (b) any Lien on any real or personal property acquired, constructed, renovated or improved by the Company after the date hereof to secure or provide for all or a portion of the purchase price of such property or a portion of the Indebtedness incurred in connection with such construction, renovation or improvement on such property, including principal and accrued or capitalized interest computed in accordance with GAAP, which Lien attaches concurrently with or within 12 months after such acquisition or the completion of such construction, renovation or improvement; provided, however, in no event may the amount of the Indebtedness secured by such Lien exceed the purchase price of such property or the cost of such construction, renovation or improvement (including accrued or capitalized interest thereon through the date of completion) computed in accordance with GAAP; (c) Liens securing Indebtedness of the Company to any wholly-owned Subsidiary or of any wholly-owned Subsidiary to the Company or to any other wholly-owned Subsidiary; (d) any Lien on any property of a Subsidiary existing at the time it becomes a Subsidiary or at the time it is merged or consolidated with or into the Company or a Subsidiary; (e) Liens for taxes, assessments or governmental charges not then due and delinquent or the validity of which is being contested in good faith and for which an adequate reserve has been established in accordance with GAAP; (f) Liens arising in connection with court proceedings securing a principal amount not in excess of 15% of the Total Assets of the Company and its Subsidiaries on a consolidated basis, provided the execution of such Liens is effectively stayed and such Liens are contested in good faith; (g) Liens, pledges or deposits in connection with workers compensation, unemployment insurance, ERISA or social security requirements; 22 28 (h) Liens arising in or incidental to the ordinary course of its business, including (i) statutory liens of landlords, carriers, warehousemen, mechanics, materialmen or suppliers, (ii) zoning restrictions and easements, rights of way, licenses, covenants and other restrictions affecting the use of real property which do not materially impair the use or value of such real property, and (iii) deposits and/or liens to secure performance of bids, trade contracts, leases and statutory obligations; (i) grants of security and rights of setoff in deposit or credit accounts, including demand, savings, passbook, share draft or like accounts, certificates of deposit, money market accounts, items held for collection or deposit, commercial paper, negotiable instruments and similar accounts and instruments held at banks or financial institutions to secure the payment or reimbursement under overdraft, acceptance and similar facilities and rights of setoff, banker's lien and other similar rights arising solely by operation of law; (j) Liens incurred in connection with the borrowing of money not permitted by (b) through (i) above, provided that immediately thereafter the Indebtedness secured by Liens incurred pursuant to this subsection, when combined with the total of the Indebtedness permitted by Section 10.5(d), without duplication, would not exceed 30% of Consolidated Net Worth; and (k) any Lien resulting from renewing, extending or refunding any Indebtedness or obligation permitted hereunder or any Lien permitted by Section 10.5, provided that the principal amount of the Indebtedness or other obligation secured thereby is not increased and the Lien is not extended to any other property. 10.7. SALE OF ASSETS. Neither the Company nor any of its Subsidiaries shall sell, lease, transfer or otherwise dispose of any assets during any single fiscal year having an aggregate book value greater than 15% of Total Assets of the Company and its Subsidiaries taken as a whole, measured as of the immediately preceding fiscal year end. Nothing in this Section shall be interpreted to restrict the Company's ability to dispose of (i) vehicles, (ii) delivery routes, (iii) assets obtained through acquisitions of businesses or assets on or after the date hereof, provided that proceeds of any such disposition shall be reinvested in the Company by reducing Indebtedness or by investing in operating assets, and (iv) obsolete, under-performing or non-core assets, disposition of which, in management's judgment, would enhance the Company's operations and profitability. 10.8. NATURE OF BUSINESS. Neither the Company nor any Subsidiary shall engage in any business if, as a result, the general nature of the business then engaged in by the Company and its Subsidiaries, taken as a whole, would be materially changed. 23 29 10.9 RESTRICTIVE AGREEMENTS. The Company will not enter into any agreement, indenture, lease or other document or instrument which, in any way, prohibits or restricts the right or ability of the Company to amend, supplement or otherwise modify the terms and provisions of this Agreement or any of the Notes. 11. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or (c) the Company defaults in the performance of or compliance with any term contained in Section 10.2, 10.3, 10.4, 10.5, 10.7, 10.8 or 7.1(d); or (d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or (e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (f) (i) the Company or any Significant Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or Make-Whole Amount or interest on any Indebtedness in an aggregate principal amount of at least $10,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Significant Subsidiary is in default in the performance of or compliance with any term of any document evidencing or relating to any Indebtedness in an aggregate principal amount of at least $10,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared due and payable before its stated maturity or before its regularly scheduled dates of payment; or 24 30 (g) the Company or any Significant Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdic tion, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the ap pointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or (h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Significant Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approv ing a petition for relief or reorganization or any other petition in bankruptcy or for liquida tion or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Significant Subsidiaries, or any such petition shall be filed against the Company or any of its Significant Subsidiaries and such petition shall not be dismissed within 60 days; or (i) a final judgment or judgments for the payment of money aggregating in excess of $20,000,000 are rendered against one or more of the Company and its Significant Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, dis charged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (j) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $10,000,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any 25 31 other such event or events, would reasonably be expected to have a Materially Adverse Effect. As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 12. REMEDIES ON DEFAULT, ETC. 12.1. ACCELERATION. (a) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. (c) If any other Event of Default has occurred and is continuing, any holder or holders of more than 66 2/3% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then out standing to be immediately due and payable. Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon and (y) any Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide com pensation for the deprivation of such right under such circumstances. 12.2. OTHER REMEDIES. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an 26 32 injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. 12.3. RESCISSION. At any time after any Notes have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of not less than 66 2/3% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. 12.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements. 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. 13.1. REGISTRATION OF NOTES. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. 27 33 13.2. TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1(A), Exhibit 1(B) or Exhibit 1(C). Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $500,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $500,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Sections 6.1 and 6.2. 13.3. REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum Net Worth of at least $5,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 28 34 14. PAYMENTS ON NOTES. 14.1. PLACE OF PAYMENT. Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made to you and the Other Purchasers at your respective principal offices. The holder of a Note may at any time, by written notice to the Company as provided in Section 18, change the place of payment of its Note(s). 14.2. HOME OFFICE PAYMENT. So long as you or your nominee shall be the holder of any Note, and not withstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, Schedule B or Schedule C, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most re cently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or sur render such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2. 15. EXPENSES, ETC. 15.1. TRANSACTION EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Company will pay all reasonable costs and expenses (including reasonable attorneys' fees of a special outside counsel and, if reasonably required, local or other counsel) actually incurred by you and each Other Purchaser or holder of a Note in connection with such transactions and in con nection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring 29 35 of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). 15.2. SURVIVAL. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agree ment and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 17. AMENDMENT AND WAIVER. 17.1. REQUIREMENTS. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing and (b) no such amendment or waiver may, without the written consent of the Company and the holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of princi pal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) a mend any of Sections 8, 11(a), 11(b), 12, 17 or 20. 17.2. SOLICITATION OF HOLDERS OF NOTES. (a) Solicitation. The Company will provide each holder of the Notes (irre spective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and 30 36 considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes or any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security or inducement is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. 17.3. BINDING EFFECT, ETC. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "THIS AGREEMENT" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 17.4. NOTES HELD BY COMPANY, ETC. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. 18. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recog nized overnight delivery service (charges prepaid), or (b) by registered or certified mail with re turn receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: 31 37 (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, Schedule B or Schedule C, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at the address specified for such communications in Schedule A, Schedule B or Schedule C or at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of C. Martin Wood III, Senior Vice President and Chief Financial Officer, or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Section 18 will be deemed given only when actually received. 19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. 20. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, "CONFIDENTIAL INFORMATION" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to 32 38 protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, officers, employees, agents, attorneys and affiliates, (to the extent such disclosure reasonably relates to the administration of the invest ment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to you, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. 21. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement. 33 39 22. MISCELLANEOUS. 22.1. SUCCESSORS AND ASSIGNS. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. 22.2. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. 22.3. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdic tion shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 22.4. CONSTRUCTION. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 22.5. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. 34 40 22.6. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Georgia excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * * If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, FLOWERS INDUSTRIES, INC. By:/s/ C. Martin Wood III ----------------------------------- C. Martin Wood III Senior Vice President and Chief Financial Officer 35 41 The foregoing is hereby agreed to as of the date thereof. ALLIED LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., its Attorney-In-Fact By: /s/ David C. Patch ------------------------------------------- Name: David C. Patch Title: Vice President THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., its Attorney-in-fact By: /s/ David C. Patch ------------------------------------------- Name: David C. Patch Title: Vice President LINCOLN-SECURITY LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., its Attorney-in-Fact By: /s/ David C. Patch ------------------------------------------- Name: David C. Patch Title: Vice President SECURITY-CONNECTICUT LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., its Attorney-in-Fact By: /s/ David C. Patch ------------------------------------------- Name: David C. Patch Title: Vice President 36 42 AMERICAN GENERAL LIFE INSURANCE COMPANY By:/s/ Julia S. Tucker ------------------------------------------- Name: Julia S. Tucker Title: Investment Officer THE VARIABLE ANNUITY LIFE INSURANCE COMPANY By:/s/ Julia S. Tucker ------------------------------------------- Name: Julia S. Tucker Title: Investment Officer CUNA MUTUAL INSURANCE SOCIETY By: Century Investment Management Co. By:/s/ Donald Heltner ------------------------------------------- Name: Donald Heltner Title: Vice President EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU By:/s/ James W. Pruden ------------------------------------------- Name: James W. Pruden Title: Attorney-in-fact MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By:/s/ Bruce E. Gaudette ------------------------------------------- Name: Bruce E. Gaudette Title: Vice President 37 43 METROPOLITAN LIFE INSURANCE COMPANY By:/s/ Michael J. Koeg ------------------------------------------------- Name: Michael J. Koeg Title: METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY By: ------------------------------------------------- Name: Bill Megevick Title: NATIONWIDE LIFE INSURANCE COMPANY By:/s/ Michael D. Groseclose ------------------------------------------------- Name: Michael D. Groseclose Title: Associate Vice President Corporate Fixed-Income Securities NATIONWIDE LIFE INSURANCE COMPANY SEPARATE ACCOUNT OH By:/s/ Michael D. Groseclose ------------------------------------------------- Name: Michael D. Groseclose Title: Associate Vice President Corporate Fixed-Income Securities UNITED OF OMAHA LIFE INSURANCE COMPANY By:/s/ Marvin D. Andersen ------------------------------------------------- Name: Marvin D. Andersen Title: First Vice President 38 44 SCHEDULE A-1 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- ALLIED LIFE INSURANCE COMPANY "A" $1,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: Harris Trust & Savings, Chicago, IL ABA #1: 071 000 288 Attention: Trust Collections DDA Account #: 109-211-3 Further credit: Allied Life "A" Account No.: 23-97588 with sufficient information to identify the source and application of such funds (2) All notices of payments and written confirmations of such wire transfers: Harris Trust & Savings 111 W. Monroe Street; Chicago, IL 60690 Attn: Private Placements For Acct: See above account name (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry St.; Renaissance Square Fort Wayne, IN 46802 Attn: Investments/Private Placements
Schedule A-1 45 SCHEDULE A-2 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- ALLIED LIFE INSURANCE COMPANY "B" $1,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: Harris Trust & Savings, Chicago, IL ABA #1: 071 000 288 Attention: Trust Collections DDA Account #: 109-211-3 Further credit: Allied Life "B" Account No.: 23-97589 with sufficient information to identify the source and application of such funds (2) All notices of payments and written confirmations of such wire transfers: Harris Trust & Savings 111 W. Monroe Street; Chicago, IL 60690 Attn: Private Placements For Acct: See above account name (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry St.; Renaissance Square Fort Wayne, IN 46802 Attn: Investments/Private Placements (4) Nominee: Harny & Co
Schedule A-2 46 SCHEDULE A-3 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Closing Principal Amount of Name and Address of Purchaser Notes to be Purchased - ----------------------------- --------------------- Date ----- CUNA MUTUAL INSURANCE SOCIETY $5,000,000 1/5/96 (1) All payments by wire trans- fer of immediately available funds to: The Chase Manhattan Bank, NA ABA 021000021 A/C = 900-9-002206 A/C = 473-63300 BNF = Funds Pending-DNI/ABS BBK = Chase Manhattan Bank/SSTO with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: CUNA Mutual Group Attn: Investment Accounting, GG-12 P.O. Box 391, Madison, WI 53701 (3) All other communications: CUNA Mutual Group, Securities Mgmt. Dept. 5910 Mineral Point Road, Madison WI 53705 Attn: Private Placements Fax # (608) 238-2316 (4) Nominee: Atwell & Co.
Schedule A-3 47 SCHEDULE A-4 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU $5,000,000 1/5/96 (1) All payments by wire trans- fer of immediately available funds to: Morgan Guaranty Trust Company of NY ABA #021-000-238 JOURNAL #999-99-024 F/A/O Employers Life Custody A/C #50135 Attn: Custody Service Dept. PPN# 343496 A@ 4 Security Descrip: 6.80% Senior Notes due January 5, 2008 (2) All notices of payments and written confirmations of such wire transfers: Employers Life Insurance Company of Wausau 2000 Westwood Drive, Wausau WI 54401 (3) All other communications: Employers Life Insurance Company of Wausau One Nationwide Plaza (1-33-07) Columbus, OH 43215-2220 Attn: Corporate Fixed-Income Securities
Schedule A-4 48 SCHEDULE A-5 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (GAN) $1,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: Bankers Trust Company, New York, NY ABA # 021001033 Private Placement Processing Account #: 99-911-145 Further credit: The Lincoln National Life Insurance Company (GAN) Custody Account No.: 98152 (On Wire Ref: Sec Name/Rate/Mat/ PPN/P=S / I=S) (2) All notices of payments and written confirmations of such wire transfers: Bankers Trust Company Attn: Private Placement Unit P. O. Box 998; Bowling Green Station New York, NY 10274 (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry Street; Renaissance Square Fort Wayne, IN 46802 Attention: Investments/Private Placements
Schedule A-5 49 SCHEDULE A-6 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (IOB) $1,000,000 12/20/95 (1) All payments by wire transfer of immediately available funds to: Bankers Trust Company, New York, NY ABA # 021001033 Private Placement Processing Account #: 99-911-145 Further credit: The Lincoln National Life Insurance Company (IOB) Custody Account No.: 98201 (On Wire Ref: Sec Name/Rate/Mat/ PPN/P=S / I=S) (2) All notices of payments and written confirmations of such wire transfers: Bankers Trust Company Attn: Private Placement Unit P. O. Box 998; Bowling Green Station New York, NY 10274 (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry Street; Renaissance Square Fort Wayne, IN 46802 Attention: Investments/Private Placements
Schedule A-6 50 SCHEDULE A-7 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (CRP) $1,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: Bankers Trust Company, New York, NY ABA # 021001033 Private Placement Processing Account #: 99-911-145 Further credit: The Lincoln National Life Insurance Company (CRP) Custody Account No.: 98231 (On Wire Ref: Sec Name/Rate/Mat/ PPN/P=S / I=S) (2) All notices of payments and written confirmations of such wire transfers: Bankers Trust Company Attn: Private Placement Unit P. O. Box 998; Bowling Green Station New York, NY 10274 (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry Street; Renaissance Square Fort Wayne, IN 46802 Attention: Investments/Private Placements
Schedule A-7 51 SCHEDULE A-8 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (IND) $3,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: Bankers Trust Company, New York, NY ABA # 021001033 Private Placement Processing Account #: 99-911-145 Further credit: The Lincoln National Life Insurance Company (IND) Custody Account No.: 98126 (On Wire Ref: Sec Name/Rate/Mat/ PPN/P=S / I=S) (2) All notices of payments and written confirmations of such wire transfers: Bankers Trust Company Attn: Private Placement Unit P. O. Box 998; Bowling Green Station New York, NY 10274 (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry Street; Renaissance Square Fort Wayne, IN 46802 Attention: Investments/Private Placements
Schedule A-8 52 SCHEDULE A-9 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ---- THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (IDP) $3,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: Bankers Trust Company, New York, NY ABA # 021001033 Private Placement Processing Account #: 99-911-145 Further credit: The Lincoln National Life Insurance Company (IDP) Custody Account No.: 98131 (On Wire Ref: Sec Name/Rate/Mat/ PPN/P=S / I=S) (2) All notices of payments and written confirmations of such wire transfers: Bankers Trust Company Attn: Private Placement Unit P. O. Box 998; Bowling Green Station New York, NY 10274 (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry Street; Renaissance Square Fort Wayne, IN 46802 Attention: Investments/Private Placements
Schedule A-9 53 SCHEDULE A-10 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (IAL) $7,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: Bankers Trust Company, New York, NY ABA # 021001033 Private Placement Processing Account #: 99-911-145 Further credit: The Lincoln National Life Insurance Company (IAL) Account No.: 98194 (On Wire Ref: Sec Name/Rate/Mat/ PPN/P=S / I=S) (2) All notices of payments and written confirmations of such wire transfers: Bankers Trust Company Attn: Private Placement Unit P. O. Box 998; Bowling Green Station New York, NY 10274 (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry Street; Renaissance Square Fort Wayne, IN 46802 Attention: Investments/Private Placements
Schedule A-10 54 SCHEDULE A-11 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- LINCOLN-SECURITY LIFE INSURANCE COMPANY $1,000,000 12/20/95 (1) All payments by wire transfer of immediately available funds to: Chase Manhattan Bank, N.A., New York, NY ABA #: 021000021 Lincoln-Security Life Ins. Co. (New York) (Universal) For Account No.:G04847 (Ref: Sec. Name/Rate/Maturity/ PPN/P=S/I=S) (2) All notices of payments and written confirmations of such wire transfers: Lincoln-Security Life Insurance Company (New York) c/o Security-Connecticut Life Insurance Company 20 Security Drive Avon, CT 06002 Att: Jodi Dean (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry Street: Renaissance Square Fort Wayne, IN 46802 Att: Investments/Private Placements
Schedule A-11 55 SCHEDULE A-12 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY $7,000,000 12/20/95 (1) All payments by wire transfer of immediately available funds to: Chase Manhattan Bank, N.A. 4 Chase MetroTech Center New York, NY 10081 ABA # 021000021 For MassMutual IFM Traditional Account No. 910-1388131 Re: 6.80% Senior Notes due Jan. 5, 2008 with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: Massachusetts Mutual Life Insurance Company Securities Custody and Collection Dept. (413) 744-3878 (3) All other communications: Massachusetts Mutual Life Insurance Company 1295 State Street Springfield, MA 01111 Attn: Securities Investment Division (General) Securities Custody and Collection Department, F381 (Payment and Corporate Action Notices)
Schedule A-12 56 SCHEDULE A-13 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY $3,000,000 12/20/95 (1) All payments by wire transfer of immediately available funds to: Chase Manhattan Bank, N.A. 4 Chase MetroTech Center New York, NY 10081 ABA # 021000021 For IFM Non-Traditional Account No. 910-2509073 Re: 6.80% Senior Notes due Jan. 5, 2008 with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: Massachusetts Mutual Life Insurance Company Securities Custody and Collection Dept. (413) 744-3878 (3) All other communications: Massachusetts Mutual Life Insurance Company 1295 State Street Springfield, MA 01111 Attn: Securities Investment Division (General) Securities Custody and Collection Department, F381 (Payment and Corporate Action Notices)
Schedule A-13 57 SCHEDULE A-14 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- METROPOLITAN LIFE INSURANCE COMPANY $20,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: The Chase Manhattan Bank, N.A. Metropolitan Branch 33 East 23rd Street, New York, NY 10010 ABA #.: 021000021 Account No.: 002-2-410591 with sufficient information to identify the source and application of such funds and PPN. (2) All notices of payments and written confirmations of such wire transfers: Metropolitan Life Insurance Company One Madison Avenue New York, NY 10021 Attn: Treasurer Telecopy No. 212-578-3910 (3) All other communications: Metropolitan Life Insurance Company One Madison Avenue New York, NY 10021 Att: Treasurer
Schedule A-14 58 SCHEDULE A-15 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY $10,000,000 12/20/95 (1) All payments by wire transfer of immediately available funds to: The Chase Manhattan Bank, N.A. Metropolitan Branch 33 East 23rd Street, New York, NY 10010 ABA No.: 021000021 Account #: 002-1-025432 with sufficient information to identify the source and application of such funds and PPN. (2) All notices of payments and written confirmations of such wire transfers: Metropolitan Property and Casualty Insurance Company 700 Quaker Lane Warwick, Rhode Island 02886 Attn: Treasurer (3) All other communications: Metropolitan Property and Casualty Insurance Company 700 Quaker Lane, Warwick, Rhode Island 02886 Attn: Treasurer Telecopy No.: 212-578-3910 (c/o Metropolitan Life Insurance Company with a copy to: Metropolitan Life Insurance Company One Madison Avenue New York, NY 10021
Schedule A-15 59 SCHEDULE A-16 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- NATIONWIDE LIFE INSURANCE COMPANY $19,000,000 1/5/96 (1) All payments by wire trans- fer of immediately available funds to: Morgan Guaranty Trust Company of New York ABA #021-000-238 Journal #999-99-024 F/A/O Nationwide Life Insurance Company Custody A/C #71615 Attn: Custody Service Dept. PPN #313496 A@ 4 Security Descrip: 6.80% Senior Notes due January 5, 2008 (2) All notices of payments and written confirmations of such wire transfers: Nationwide Life Insurance Company One Nationwide Plaza (1-32-09) Columbus, Ohio 43215-2220 Att: Corporate Money Management (3) All other communications: Nationwide Life Insurance Company One Nationwide Plaza (1-33-07) Columbus, Ohio 43215-2220 Att: Corporate Fixed-Income Securities
Schedule A-16 60 SCHEDULE A-17 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- NATIONWIDE LIFE INSURANCE COMPANY SEPARATE ACCOUNT OH $1,000,000 1/5/96 (1) All payments by wire transfer of immediately available funds to: Morgan Guaranty Trust Company of New York ABA #021-000-238 Journal #999-99-024 F/A/O Nationwide Life Insurance Company Separate Acct. OH Custody A/C #74605 Attn: Custody Service Dept. PPN# 343496 6.80% Senior Note Due January 5, 2008 with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: Nationwide Life Insurance Company Separate Account OH One Nationwide Plaza (1-32-09) Columbus, Ohio 43115-2220 Att: Corporate Money Management (3) All other communications: Nationwide Life Insurance Company Separate Account OH One Nationwide Plaze (1-33-07) Columbus, Ohio 43215-2220 Att: Corporate Fixed-Income Securities
Schedule A-17 61 SCHEDULE A-18 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- SECURITY-CONNECTICUT LIFE INSURANCE COMPANY $1,000,000 12/20/95 (1) All payments by wire trans- fer of immediately available funds to: Shawmut Bank Connecticut, N.A. 777 Main Street, Hartford, CT 06115 ABA Routing #: 011900445 For Acct of: Sec-Conn Life (Univ Life) Account #: 0156196 (Ref: Security/Rate/Maturity/PPN/P=S/I=S) (2) All notices of payments and written confirmations of such wire transfers: Security-Connecticut Life Insurance Company 20 Security Drive Avon, CT 06001 Att: Jodi Dean (3) All other communications: Lincoln Investment Management, Inc. 200 East Berry Street, Renaissance Square Fort Wayne, IN 46802 Att: Investment/Private Placements
Schedule A-18 62 SCHEDULE A-19 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2008
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- THE VARIABLE ANNUITY LIFE INSURANCE COMPANY $10,000,000 1/5/96 (1) All payments by wire transfer of immediately available funds to: ABA #011000028 State Street Bank and Trust Company Boston, MA 02101 Re: The Variable Annuity Life Insurance Company AC-0125-821-9 OBI=PPN # and description of payment, Fund Number PA 54 with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: The Variable Annuity Life Insurance Company and PA 54 c/o State Street Bank and Trust Company Insurance Services Custody (AH2) 1776 Heritage Drive North Quincy, MA 02171 Facsimile Number: (6;17) 985-4923 (3) All other communications: The Variable Annuity Life Insurance Company c/o American General Corporation Att: Investment Research Dept., A37-01 P. O. Box 3247 Houston, Texas 77253-3247 Overnight Mail Address: 2929 Allen Parkway Houston, TX 77019-2155 Facsimile No. (713) 831-1366
Schedule A-19 63 SCHEDULE B-1 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2011
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- AMERICAN GENERAL LIFE INSURANCE COMPANY $2,000,000 1/5/96 (1) All payments by wire transfer of immediately available funds to: ABA #011000028 State Street Bank and Trust Company Boston, MA 02101 Re: American General Life Insurance Company AC-0125-880-5 OBI=PPN # and description of payment Fund Number PA40 with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: American General Life Insurance Company and PA 40 c/o State Street Bank and Trust Company Insurance Services Custody (AH2) 1776 Heritage Drive North Quincy, MA 02171 Facsimile Number: (617) 985-4923 (3) All other communications: American General Life Insurance Company c/o American General Corporation Attn: Investment Research Dept. A37-01 P. O. Box 3247, Houston, Texas 77253-3247 Overnight Mail Address:2929 Allen Parkway Houston, TX 77019-2155 Facsimile Number: (713) 831-1366
Schedule B-1 64 SCHEDULE B-2 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2011
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- THE VARIABLE ANNUITY LIFE INSURANCE COMPANY $18,000,000 1/5/96 (1) All payments by wire transfer of immediately available funds to: ABA #011000028 State Street Bank and Trust Company Boston, MA 02101 Re: The Variable Annuity Life Insurancy Company AC-0125-821-9 OBI=PPN # and description of payment Fund Number PA 54 with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: The Variable Annuity Life Insurance Company and PA 54 c/o State Street Bank and Trust Company Insurance Services Custody (AH2) 1776 Heritage Drive North Quincy, MA 02171 Facsimile Number: (617) 985-4923 (3) All other communications: The Variable Annuity Life Insurance Company c/o American General Corporation Attn: Investment Research Dept. A37-01 P. O. Box 3247, Houston, Texas 72253-3247 Overnight Mail Address: 2929 Allen Parkway Houston, TX 77019-2155 Facsimile No.: (713) 831-1366
Schedule B-2 65 SCHEDULE C-1 INFORMATION RELATING TO PURCHASERS OF NOTES DUE JANUARY 5, 2016
Principal Amount of Closing Name and Address of Purchaser Notes to be Purchased Date - ----------------------------- --------------------- ------- UNITED OF OMAHA LIFE INSURANCE COMPANY $5,000,000 12/20/95 (1) All payments by wire transfer of immediately available funds to: FirsTier Bank - Omaha 17th & Farnam Street Omaha, NE 68102 ABA # 1040-00029 Account # 144-7-076 with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: United of Omaha Life Insurance Company Att: Investment Division/ Securities Accounting Mutual of Omaha Plaza Omaha, NE 68175-0001 (3) All other communications: United of Omaha Life Insurance Company Att: Investment Division/ Securities Accounting Mutual of Omaha Plaza Omaha, NE 68175-0001 (4) Nominee: Harny & Co
Schedule C-1 66 SCHEDULE D DEFINED TERMS As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "AFFILIATE" means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person. As used in this definition, "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company. "BUSINESS DAY" means (a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in Atlanta, Georgia are required or authorized to be closed. "CAPITALIZED LEASE" means any lease which is required to be capitalized on the balance sheet of the lessee pursuant to GAAP but shall exclude any lease which at the time of its incurrence was an operating lease for purposes of GAAP as in effect at such time. "CLOSING" is defined in Section 3. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "COMPANY" means Flowers Industries, Inc., a Georgia corporation. "CONFIDENTIAL INFORMATION" is defined in Section 20. "CONSOLIDATED NET INCOME" shall mean the net income and net losses of the Company and its Subsidiaries on a consolidated basis as defined according to GAAP after excluding the sum of (i) any undistributed net income of a Subsidiary to the extent that a distribution is prohibited by agreement, judgment or regulation, (ii) extraordinary gains or losses, 1 Schedule D 67 SCHEDULE D and (iii) the earnings (or losses) of any Person acquired prior to the date of its consolidation into the Company. "CONSOLIDATED NET WORTH" means the Net Worth of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED TOTAL DEBT" means the aggregate of all Indebtedness of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP, excluding, however, any Convertible Redeemable Capital Stock or Convertible Subordinated Debt if the current market value of an equity security into which such Convertible Redeemable Capital Stock or Convertible Subordinated Debt is convertible is greater than the conversion price for such security. "CONVERTIBLE REDEEMABLE CAPITAL STOCK" shall mean any capital stock that by its terms (or by the terms of any agreement by which or equity security into which it is convertible or for which it is exchangeable or any other agreement) or upon the happening of any event matures or is or will become mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, or is exchangeable for or convertible into an equity security of the Company. "CONVERTIBLE SUBORDINATED DEBT" means any Indebtedness of the Company (i) which is and remains subordinated in right of payment to the obligations of the Company on the Notes and (ii) which by its terms is exchangeable for or convertible into an equity security of the Company. "DEFAULT" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "DEFAULT RATE" means that rate of interest that is the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes or (ii) 2% over the rate of interest publicly announced by The Chase Manhattan Bank, N.A. in New York, New York as its "base" or "prime" rate. "ENVIRONMENTAL LAWS" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but 2 Schedule D 68 SCHEDULE D not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "EVENT OF DEFAULT" is defined in Section 11. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "GOVERNMENTAL AUTHORITY" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or adminis trative functions of, or pertaining to, any such government. "GUARANTY" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: 3 Schedule D 69 SCHEDULE D (a) to purchase such Indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such Indebt edness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of any other Person to make payment of the Indebtedness or obligation; or (d) otherwise to assure the owner of such Indebtedness or obligation against loss in respect thereof. In any computation of the Indebtedness or other liabilities of the obligor under any Guaranty, the Indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "HAZARDOUS MATERIALS" shall mean, collectively, any polychlorinated biphenyls, petroleum or petroleum derived substance, friable asbestos, and any toxic or otherwise hazardous waste, material or substance, including, without limitation, all substances with respect to which liability or standards of conduct may be imposed pursuant to any Environmental Law. "HOLDER" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "INDEBTEDNESS" with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); 4 Schedule D 70 SCHEDULE D (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capitalized Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. "INSTITUTIONAL INVESTOR" means (a) any original purchaser of a Note, (b) any holder of a Note holding more than 5% of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "LIEN" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capitalized Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "MAKE-WHOLE AMOUNT" is defined in Section 8.6. "MATERIAL" means material in relation to the business, operations, affairs, financial condition, assets, or properties of the Company and its Subsidiaries taken as a whole. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries 5 Schedule D 71 SCHEDULE D taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes. "MEMORANDUM" is defined in Section 5.3. "MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "NET WORTH" of any Person means the Total Assets of such Person less all liabilities of such Person which would be shown as liabilities on a balance sheet of such Person as of such time prepared in accordance with GAAP. "NOTES" is defined in Section 1. "OFFICER'S CERTIFICATE" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "OTHER PURCHASERS" is defined in Section 2. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "PERSON" means an individual, corporation, limited liability company, association, partnership, trust, joint venture, unincorporated organization, or a government or agency or political subdivision thereof. "PLAN" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or were required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "PREFERRED STOCK" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. 6 Schedule D 72 SCHEDULE D "PROPERTY" or "PROPERTIES" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. "REQUIRED HOLDERS" means, at any time, the holders of at least 66 2/3% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Com pany or any of its Affiliates). "RESPONSIBLE OFFICER" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement. "RESTRICTED PAYMENT" means any dividend, distribution or payment in respect of the capital stock of the Company or any Subsidiary, whether in cash or property (other than of capital stock or other equity interests of a Subsidiary owned legally and beneficially by the Company or another Subsidiary), including, without limitation, any distribution resulting in the acquisition by the Company of securities which would constitute treasury stock. If a Restricted Payment is made with property other than cash, such property shall be valued at the greater of its book value or its fair market value, in either case determined as of the time such payment is made. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. "SENIOR FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "SIGNIFICANT SUBSIDIARY" means at any time any Subsidiary that would at such time constitute a "significant subsidiary" (as such term is defined in Regulation S-X of the Securities and Exchange Commission as in effect on the date of the Closing) of the Company. "SUBSIDIARY" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and 7 Schedule D 73 SCHEDULE D does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Sub sidiary" is a reference to a Subsidiary of the Company. "SWAPS" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "TOTAL ASSETS" means, with respect to any Person at any time, the total assets of such Person as set forth or reflected on the most recent consolidated balance sheet of such Person, prepared in accordance with GAAP. "TOTAL CAPITALIZATION" means the sum of (i) Consolidated Total Debt and (ii) Consolidated Net Worth. "WHOLLY-OWNED SUBSIDIARY" means, at any time, any Subsidiary one hundred percent (100%) of all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Subsidiaries at such time. 8 Schedule D 74 EXHIBIT 1(A) [FORM OF NOTE] FLOWERS INDUSTRIES, INC. 6.80% SENIOR NOTE DUE JANUARY 5, 2008 No. [_____] [Date] $[_______] PPN 343496 FOR VALUE RECEIVED, the undersigned, FLOWERS INDUSTRIES, INC. (herein called the "Company"), a corporation organized and existing under the laws of the State of Georgia, hereby promises to pay to[______________________], or registered assigns, the principal sum of[___________________________] DOLLARS on January 5, 2008, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.80% per annum from the date hereof, payable semiannually, on the 5th day of January and July in each year, commencing with the earlier to occur of the January 5 or the July 5 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.80% or (ii) 2% over the rate of interest publicly announced by The Chase Manhattan Bank, N.A. from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of the holder of this Note, at the address for payment indicated on Schedule A attached to the Note Purchase Agreement referred to below, or at such other place as the holder of this Note shall have designated by written notice to the Company as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to that certain Note Purchase Agreement, dated December 20, 1995 (as from time to time amended, the "Note Purchase Agreement"), by and among the Company and the respective 1 Exhibit 1(A) 75 Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreement. This Note is also subject to optional pre payment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Georgia. FLOWERS INDUSTRIES, INC. By ------------------------- C. Martin Wood III Senior Vice President and Chief Financial Officer 2 Exhibit 1(A) 76 EXHIBIT 1(B) [FORM OF NOTE] FLOWERS INDUSTRIES, INC. 6.99% SENIOR NOTE DUE JANUARY 5, 2011 No. [_____] [Date] $[_______] PPN 343496 FOR VALUE RECEIVED, the undersigned, FLOWERS INDUSTRIES, INC. (herein called the "Company"), a corporation organized and existing under the laws of the State of Georgia, hereby promises to pay to[______________________], or registered assigns, the principal sum of [__________________________] DOLLARS on January 5, 2011, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.99% per annum from the date hereof, payable semiannually on the 5th day of January and July in each year, commencing with the earlier to occur of the January 5 or the July 5 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make- Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.99% or (ii) 2% over the rate of interest publicly announced by The Chase Manhattan Bank, N.A. from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of the holder of this Note, at the address for payment indicated on Schedule B attached to the Note Purchase Agreement referred to below, or at such other place as the holder of this Note shall have designated by written notice to the Company as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to that certain Note Purchase Agreements, dated December 20, 1995 (as from time to time amended, the "Note Purchase Agreement"), by and among the Company and the respective 1 Exhibit 1(B) 77 Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreement. This Note is also subject to optional pre payment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Georgia. FLOWERS INDUSTRIES, INC. By ------------------------- C. Martin Wood III Senior Vice President and Chief Financial Officer 2 Exhibit 1(B) 78 EXHIBIT 1(C) [FORM OF NOTE] FLOWERS INDUSTRIES, INC. 7.08% SENIOR NOTE DUE JANUARY 5, 2016 No. [_____] [Date] $[_______] PPN 343496 FOR VALUE RECEIVED, the undersigned, FLOWERS INDUSTRIES, INC. (herein called the "Company"), a corporation organized and existing under the laws of the State of Georgia, hereby promises to pay to [_____________________], or registered assigns, the principal sum of [__________________________] DOLLARS on January 5, 2016, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 7.08% per annum from the date hereof, payable semiannually on the 5th day of January and July in each year, commencing with the earlier to occur of the January 5 or the July 5 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make- Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 9.08% or (ii) 2% over the rate of interest publicly announced by The Chase Manhattan Bank from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of the holder of this Note at the address for payment indicated on Schedule C attached to the Note Purchase Agreement referred to below, or at such other place as the holder of this note shall have designated by written notice to the Company as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant that certain Note Purchase Agreement, dated as of December 20, 1995 (as from time to time amended, the "Note Purchase Agreement"), the Company and the respective Purchasers 1 Exhibit 1(C) 79 named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreement. This Note is also subject to optional pre payment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Georgia. FLOWERS INDUSTRIES, INC. By ------------------------- C. Martin Wood III Senior Vice President and Chief Financial Officer 2 Exhibit 1(C) 80 EXHIBIT 4.4(a) FORM OF OPINION OF ASSISTANT GENERAL COUNSEL OF THE COMPANY Matters To Be Covered In Opinion of Assistant General Counsel To the Company 1. Each of the Company and its Significant Subsidiaries being duly incorpo rated, validly existing and in good standing and having requisite corporate power and authority to issue and sell the Notes and to execute and deliver the documents. 2. Each of the Company and its Significant Subsidiaries being duly qualified and in good standing as a foreign corporation in appropriate jurisdictions. 3. Due authorization and execution of the documents and such documents being legal, valid, binding and enforceable. 4. No conflicts with charter documents, laws or other material agreements. 5. All consents required to issue and sell the Notes and to execute and deliver the documents having been obtained. 6. No litigation questioning validity of documents. Exhibit 4.4(a) 81 EXHIBIT 4.4(b) FORM OF OPINION OF SPECIAL COUNSEL OF THE COMPANY Matters To Be Covered In Opinion of Special Counsel To the Company 1. Based upon certain representations, the Notes not requiring registration under the Securities Act of 1933, as amended; no need to qualify an indenture under the Trust Indenture Act of 1939, as amended. 2. No violation of Regulations G, T or X of the Federal Reserve Board. 3. Company not an "investment company", or a company "controlled" by an "investment company", under the Investment Company Act of 1940, as amended. 4. Enforceability of all documents. Exhibit 4.4(b) 82 EXHIBIT 4.4(c) FORM OF OPINION OF SPECIAL COUNSEL TO THE PURCHASERS [TO BE PROVIDED ON A CASE BY CASE BASIS] Exhibit 4.4(c) 83 SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT THIS SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT made this 12th day of March, 1998, by and among Flowers Industries, Inc., a Georgia corporation (the "Company") and each of the holders (the "Holders") of the Notes (as defined in that certain Note Purchase Agreement dated December 20, 1995 by and among the Company and each of the Purchasers (the "Note Purchase Agreement"). Capitalized terms not otherwise defined in this Second Amendment to Note Purchase Agreement shall have the meaning given them in the Note Purchase Agreement; W I T N E S S E T H: WHEREAS, the Company and the Holders have entered into the Note Purchase Agreement; WHEREAS, the parties hereto amended the Note Purchase Agreement to amend the ratio of Consolidated Total Debt to Total Capitalization; WHEREAS, the parties hereto desire to amend the Note Purchase Agreement to (i) exclude Keebler Foods Company, a Delaware corporation, and its subsidiaries ("Keebler") from the definition of Subsidiary, (ii) define the nature of permitted investments in Keebler and (iii) define the minimum consolidated net worth of the Company; WHEREAS, pursuant to Section 17.1 of the Note Purchase Agreement, the Note Purchase Agreement may be amended with the written consent of the Company and the Required Holders; NOW, THEREFORE, for and in consideration of the premises and the mutual promises, agreements, representations, warranties and covenants hereinafter set forth, and the sum of ten dollars and other good and valuable consideration, the receipt and sufficiency of which is hereby specifically agreed to and acknowledged, the Note Purchase Agreement is hereby amended as follows: 1. Section 10.1 of the Note Purchase Agreement is hereby amended by adding at the end of said section a new sentence, reading as follows: "Solely for the purposes of this Section 10.1 and notwithstanding any contrary provision in this Agreement, Keebler shall be deemed to be a Subsidiary of the Company." 84 2. The Note Purchase Agreement is hereby amended by adding a new section 10.10 immediately following Section 10.9 of the Note Purchase Agreement, reading as follows: "10.10 INVESTMENT IN KEEBLER. Neither the Company nor any of its Subsidiaries shall make any Investment in Keebler except for Permitted Keebler Investments." 3. The Note Purchase Agreement is hereby amended by adding a new section 10.11 immediately following Section 10.10 of the Note Purchase Agreement, reading as follows: "10.11 MINIMUM CONSOLIDATED NET WORTH The Consolidated Net Worth of the Company will at no time be less than: (A) prior to the date of the first public issuance of capital stock of the Company (other than in connection with any employee benefit plan) occurring after the date hereof (the "Next Public Offering"), the greater of (i) 85% of Consolidated Net Worth as of the end of the fiscal quarter of the Company ending September 20, 1997, plus the sum of (x) 50% of the cumulative net proceeds of capital stock received during any period after the date hereof, plus (y) 50% of any equity resulting from a conversion of Indebtedness during any period after the date hereof, less (z) any amount of equity repurchased during any period after the date hereof, calculated quarterly at the end of each fiscal quarter of the Company; and (ii) $200,000,000; and (B) from and after the date of the Next Public Offering, the greater of (i) 85% of Consolidated Net Worth as of the end of the fiscal quarter of the Company most recently ended, adjusted to give effect on a proforma basis to the Next Public Offering, plus the sum of (x) 50% of the cumulative net proceeds of capital stock received during any period after the Next Public Offering, plus (y) 50% of any equity resulting from a conversion of Indebtedness during any period after the Next Public Offering, less (z) any amount of equity repurchased during any period after the Next Public Offering, calculated quarterly at the end of each fiscal quarter of the Company; and (ii) $450,000,000. 4. Section 11(c) of the Note Purchase Agreement is hereby amended by replacing the phrase "10.8 or 7.1(d)" with the phrase "10.8, 10.10, 10.11 or 7.1(d)". 5. Schedule D of the Note Purchase Agreement is hereby amended by adding a new definition of Investment immediately following the definition of Institutional Investor, reading as follows: "Investment" means any investment in any Person, whether by means of purchase or acquisition of obligations or securities of such Person, capital contribution to such Person, loan or advance to such Person, making of a time deposit with such Person, guaranty or assumption of any obligation of such Person or otherwise." 2 85 6. Schedule D of the Note Purchase Agreement is hereby amended by adding a new definition of Permitted Keebler Investments immediately following the definition of PBGC, reading as follows: "Permitted Keebler Investments" means: (i) the Keebler Acquisition; and (ii) provided that the Keebler Acquisition has been consummated, additional shares of common capital stock in Keebler Foods Company, a Delaware corporation ("Keebler") acquired from time to time (a) from third parties in the open market, (b) from Bermore, Limited and Artal Luxembourg S.A. in private transactions, (c) from management of Keebler in private transactions and/or (d) from Keebler as part of an offering of stock by Keebler (whether public or private), but in the case of this clause (d), only to the extent necessary for the Company to maintain ownership of at least 51% of the common capital stock of Keebler, on a fully diluted basis." 7. The definition of "Subsidiary" in Schedule D of the Note Purchase Agreement is hereby amended by adding at the end of said definition a new sentence, reading as follows: "Notwithstanding any provision (other than Section 10.1) in this Agreement to the contrary, Subsidiary shall not include an Unrestricted Subsidiary." 8. Schedule D of the Note Purchase Agreement is hereby amended by adding a new definition of Unrestricted Subsidiary immediately following the definition of Total Capitalization, reading as follows: ""Unrestricted Subsidiary" means Keebler and its subsidiaries, immediately following the acquisition by the Company from Artal Luxembourg S.A. and Bermore Limited a sufficient number of shares of common capital stock of Keebler, such that the Company will own approximately 51% of the common capital stock of Keebler, on a fully diluted basis (the "Keebler Acquisition"), and thereafter for so long as Keebler is a Subsidiary and "Unrestricted Subsidiaries" means, collectively, Keebler and its Subsidiaries." 9. Except to the extent expressly amended herein, all terms and conditions of the Note Purchase Agreement are hereby affirmed and shall remain in full force and effect. 10. The Company hereby represents to the Holders that as of the date hereof no Default or Event of Default exists under the Note Purchase Agreement. 11. This Second Amendment to Note Purchase Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3 86 IN WITNESS WHEREOF, each party hereto has executed or caused this Second Amendment to Note Purchase Agreement to be executed on its behalf, all on the day and year first above written. FLOWERS INDUSTRIES, INC. "Company" By: /s/ C.M. Wood III ------------------------------------- Name: C.M. Wood III Title: Senior Vice President 4 87 SCHEDULE OF HOLDERS ALLIED LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., Its Attorney-In-Fact By: /s/ J. Steven Staggs ------------------------------------ Name: J. Steven Staggs Title: Vice President THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., its Attorney-in-fact By: /s/ J. Steven Staggs ------------------------------------ Name: J. Steven Staggs Title: Vice President RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK successor by merger to LINCOLN-SECURITY LIFE INSURANCE COMPANY By: /s/ James V. Wittich ------------------------------------ Name: James V. Wittich Title: Vice President, Investments SECURITY-CONNECTICUT LIFE INSURANCE COMPANY By: /s/ James V. Wittich ------------------------------------ Name: James V. Wittich Title: Assistant Treasurer 5 88 AMERICAN GENERAL LIFE INSURANCE COMPANY and THE VARIABLE ANNUITY LIFE INSURANCE COMPANY By: /s/ Peter V. Tuters ----------------------------------------- Name: Peter V. Tuters Title: Vice President and Chief Investment Officer CUNA MUTUAL INSURANCE SOCIETY By: CIMCO Inc. By: /s/ Mark Prusha ---------------------------------- Name: Mark Prusha Title: Senior Investment Officer EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU By: /s/ Charles S. Bath ----------------------------------------- Name: Charles S. Bath Title: Attorney-in-Fact MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ Lawrence D. Stillman ----------------------------------------- Name: Lawrence D. Stillman Title: Managing Director 6 89 METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Gerald P. Marcus ----------------------------------- Name: Gerald P. Marcus Title: Director METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY By: /s/ James A. Wiviott ----------------------------------- Name: James A. Wiviott Title: Authorized Signatory NATIONWIDE LIFE INSURANCE COMPANY By: /s/ Charles S. Bath ----------------------------------- Name: Charles S. Bath Title: Vice President Equity Securities NATIONWIDE LIFE INSURANCE COMPANY SEPARATE ACCOUNT OH By: /s/ Charles S. Bath ----------------------------------- Name: Charles S. Bath Title: Vice President Equity Services UNITED OF OMAHA LIFE INSURANCE COMPANY By: /s/ Curtis R. Caldwell ----------------------------------- Name: Curtis R. Caldwell Title: First Vice President 7 90 FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT THIS FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT made this 23rd day of January, 1998, by and among Flowers Industries, Inc., a Georgia corporation (the "Company") and each of the holders (the "Holders") of the Notes (as defined in that certain Note Purchase Agreement dated December 20, 1995 by and among the Company and each of the Purchasers (the "Note Purchase Agreement"). Capitalized terms not otherwise defined in this First Amendment to Note Purchase Agreement shall have the meaning given them in the Note Purchase Agreement; W I T N E S S E T H: WHEREAS, the Company and the Holders have entered into the Note Purchase Agreement; WHEREAS, the parties hereto desire to amend the Note Purchase Agreement to amend the ratio of Consolidated Total Debt to Total Capitalization; WHEREAS, pursuant to Section 17.1 of the Note Purchase Agreement, the Note Purchase Agreement may be amended with the written consent of the Company and the Required Holders; NOW, THEREFORE, for and in consideration of the premises and the mutual promises, agreements, representations, warranties and covenants hereinafter set forth, and the sum of ten dollars and other good and valuable consideration, the receipt and sufficiency of which is hereby specifically agreed to and acknowledged, the Note Purchase Agreement is hereby amended as follows: 1. Section 10.3 of the Note Purchase Agreement is hereby amended by deleting from such Section "65%" and substituting in lieu thereof "75%". 2. The foregoing amendment shall remain in effect until the earlier of (i) the closing of a public offering of common stock by the Company or (ii) December 31, 1998. 3. Except to the extent expressly amended herein, all terms and conditions of the Note Purchase Agreement are hereby affirmed and shall remain in full force and effect. 4. The Company hereby represents to the Holders that as of the date hereof no Default or Event of Default exists under the Note Purchase Agreement; 5. This First Amendment to Note Purchase Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 91 IN WITNESS WHEREOF, each party hereto has executed or caused this First Amendment to Note Purchase Agreement to be executed on its behalf, all on the day and year first above written. FLOWERS INDUSTRIES, INC. "Company" By: /s/ C. M. Wood III ------------------------------------ Name: C. M. Wood III Title: Senior Vice President 2 92 SCHEDULE OF HOLDERS ALLIED LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., Its Attorney-In-Fact By: /s/ J. Steven Staggs ---------------------------------- Name: J. Steven Staggs Title: Vice President THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., its Attorney-in-fact By: /s/ J. Steven Staggs ---------------------------------- Name: J. Steven Staggs Title: Vice President LINCOLN-SECURITY LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., its Attorney-in-Fact By: /s/ James V. Wittich ---------------------------------- Name: James V. Wittich Title: Vice President, Investments SECURITY-CONNECTICUT LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., its Attorney-in-Fact By: /s/ James V. Wittich ---------------------------------- Name: James V. Wittich Title: Assistant Treasurer 3 93 AMERICAN GENERAL LIFE INSURANCE COMPANY and THE VARIABLE ANNUITY LIFE INSURANCE COMPANY By: /s/ Julia S. Tucker ---------------------------------------------------- Name: Julia S. Tucker Title: Investment Officer CUNA MUTUAL INSURANCE SOCIETY By: CIMCO INC. By: /s/ Donald Heltner --------------------------------------------- Name: Donald Heltner Title: Vice President EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU By: /s/ Edwin P. McCausland, Jr. ---------------------------------------------------- Name: Edwin P. McCausland, Jr. Title: Vice President, Fixed-Income Securities MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ Walter T. Dwyer ---------------------------------------------------- Name: Walter T. Dwyer Title: Managing Director 4 94 METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Gerald P. Marcus ---------------------------------------------------- Name: Gerald P. Marcus Title: Director METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY By: /s/ James A. Wiviott ---------------------------------------------------- Name: James A. Wiviott Title: Authorized Signatory NATIONWIDE LIFE INSURANCE COMPANY By: /s/ Edwin P. McCausland, Jr. ---------------------------------------------------- Name: Edwin P. McCausland, Jr. Title: Vice President, Fixed-Income Securities NATIONWIDE LIFE INSURANCE COMPANY SEPARATE ACCOUNT OH By: /s/ Edwin P. McCausland, Jr. ---------------------------------------------------- Name: Edwin P. McCausland, Jr. Title: Vice President, Fixed-Income Securities UNITED OF OMAHA LIFE INSURANCE COMPANY By: /s/ Curtis R. Caldwell ---------------------------------------------------- Name: Curtis R. Caldwell Title: First Vice President 5 EX-11 6 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE (Amounts in Thousands except Share Date)
For the 27 Weeks Ended For the 52 Weeks Ended ----------- --------------------------------------------- January 3, June 28, June 29, July 1, 1998 1997 1996 1995 ----------- --------------------------------------------- Computation of net income Basic: Income before cumulative effect of changes in accounting principles $ 33,448 $ 62,324 $ 30,768 $ 42,301 Cumulative effect of changes in accounting principles, net of tax (9,888) --------- --------- --------- --------- Net income for basic earnings per common share $ 23,560 $ 62,324 $ 30,768 $ 42,301 ========= ========= ========= ========== Diluted: Income before cumulative effect of changes in accounting principles $ 33,448 $ 62,324 $ 30,768 $ 42,301 Cumulative effect of changes in accounting principles, net of tax (9,888) --------- --------- --------- --------- Net income for diluted earnings per common share $ 23,560 $ 62,324 $ 30,768 $ 42,301 ========= ========= ========= ========== Number of shares used in calculation of per common share data: Weighted average number of common shares outstanding during the year used for basic earnings per share 88,368 88,000 86,933 86,229 Shares issuable upon exercise of employee stock options based on average market price 405 401 278 209 --------- --------- --------- --------- Weighted average number of shares used for diluted earnings per common share 88,773 88,401 87,211 86,438 ========= ========= ========= ========= Net income per common share: Basic: Income before cumulative effect of changes in accounting principles $ .38 $ .71 $ .35 $ .49 Cumulative effect of changes in accounting principles, net of tax (.11) --------- --------- --------- --------- Net income per common share $ .27 $ .71 $ .35 $ .49 ========= ========= ========= ========= Diluted: Income before cumulative effect of changes in accounting principles $ .38 $ .71 $ .35 $ .49 Cumulative effect of changes in accounting principles, net of tax (.11) --------- --------- --------- --------- Net income per common share $ .27 $ .71 $ .35 $ .49 ========= ========= ========= =========
EX-21 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT There is no parent of the Registrant. The Registrant owns 100% of the voting securities of each subsidiary listed below, except that each subsidiary marked with an asterisk owns 100% of the voting securities of the subsidiary or subsidiaries indented immediately below such marked subsidiary. All subsidiaries listed below are included in the consolidated financial statements of the Registrant.
STATE OF SUBSIDIARY INCORPORATION - ---------- --------------- *Flowers Bakeries, Inc. .................................... Delaware *Flowers Baking Co. of Alabama, Inc. .................. Alabama Flowers Baking Company of Birmingham, Inc. .......... Alabama Flowers Baking Co. of Opelika, Inc. ................. Alabama Hardin's Bakery, Incorporated........................ Alabama Flowers Specialty Foods of Montgomery, Inc. ......... Alabama Midtown Bakery, Inc. ................................ Alabama *Flowers Baking Co. of Arkansas, Inc. ................. Arkansas Flowers Baking Co. of Texarkana, Inc. ............... Arkansas Holsum Baking Company................................ Arkansas Shipley Baking Company............................... Arkansas Flowers Baking Co. of Chattanooga, Inc. ............... Tennessee *Flowers Baking Co. of Florida, Inc. .................. Florida Flowers Baking Co. of Bradenton, Inc. ............... Florida Flowers Baking Co. of Jacksonville, Inc. ............ Florida Flowers Baking Co. of Miami, Inc. ................... Florida *Flowers Baking Co. of Georgia, Inc. .................. Georgia European Bakers, Ltd. ............................... Georgia Dan-Co Bakery, Inc. ................................. Georgia Flowers Baking Co. of Thomasville, Inc. ............. Georgia Mrs. Smith's Bakeries, Inc. ......................... Georgia Table Pride, Inc. ................................... Georgia *Flowers Baking Co. of Villa Rica, Inc. ............. Georgia Flowers Baking Co. of Gadsden, Inc. .............. Alabama Flowers Specialty of Suwanee, Inc. .................... Georgia Flowers Frozen Bakery Distributors, Inc. .............. Georgia Aunt Fanny's Bakery, Inc. ............................. Georgia *Flowers Baking Co. of North Carolina, Inc. ........... North Carolina Flowers Baking Co. of Jamestown, Inc. ............... North Carolina Daniels Home Bakery of North Carolina, Inc. ......... North Carolina Franklin Baking Company..................................... North Carolina *Flowers Holding Co. of S. C., Inc. ................... South Carolina Flowers Baking Co. of Fountain Inn, Inc. ............ South Carolina Flowers Baking Company of South Carolina, Inc. ...... South Carolina South Carolina Baking Co., Inc. ..................... South Carolina *Flowers Baking Co. of Tennessee, Inc. ................ Tennessee Flowers Baking Co. of Morristown, Inc. .............. Tennessee Flowers Fresh Bakery Distributors, Inc. ............. Tennessee *Flowers Baking Co. of Texas, Inc. .................... Texas El Paso Baking Co., Inc. ............................ Texas Flowers Baking Co. of Tyler, Inc. ................... Georgia San Antonio Baking Co., Inc. ........................ Texas
2 2
STATE OF SUBSIDIARY INCORPORATION - ---------- --------------- Austin Baking Co., Inc. ............................. Texas Corpus Christi Baking Co., Inc. ..................... Texas Butterkrust Bakery, Inc. ............................ Texas San Angelo Distributing Co., Inc. ................... Texas *Flowers Baking Co. of Virginia, Inc. ................. Virginia Flowers Baking Co. of Lynchburg, Inc. ............... Virginia Flowers Baking Co. of Norfolk, Inc. ................. Virginia Flowers Baking Co. of West Virginia, Inc. ............. West Virginia Storck Baking Company.................................. West Virginia Aunt Fanny's Bakery of Pennsylvania, Inc. ............. Pennsylvania Mrs. Smith's Bakeries of London, Inc. ................. Kentucky *Huval Bakery, Incorporated............................ Louisiana *Bunny Bread, Inc. .................................. Louisiana Flowers Baking Co. of Baton Rouge, Inc. .......... Louisiana Schott's Bakery, Inc. ............................... Texas Pies, Inc. .......................................... Minnesota *Stilwell Foods, Inc. .................................... Oklahoma *Mrs. Smith's Bakeries of Pennsylvania, Inc. ............. Georgia
3 EX-23.A 8 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23(a) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-8 and Form S-3 (No. 33-34855) for the Flowers Industries, Inc. 1982 Incentive Stock Option Plan and the Flowers Industries, Inc. 1989 Executive Stock Incentive Plan dated May 18, 1990 and of the Registration Statements on Form S-8 (No. 33-91198 and No. 333-23351) for the Flowers Industries, Inc. 401(k) Retirement Savings Plan, of our report dated March 23, 1998, appearing in this Transition Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule which appears in this Form 10-K. /s/ Price Waterhouse LLP - ------------------------ Price Waterhouse LLP Atlanta, Georgia March 27, 1998 EX-23.B 9 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-8 and Form S-3 (No. 33-34855) for the Flowers Industries, Inc. 1982 Incentive Stock Option Plan and the Flowers Industries, Inc. 1989 Executive Stock Incentive Plan dated May 18, 1990 and of the Registration Statements on Form S-8 (No. 33-91198 and No. 333-23351) for the Flowers Industries, Inc. 401(k) Retirement Savings Plan, of our reports dated February 18, 1998, on our audits of the consolidated financial statements and financial statement schedule of Keebler Foods Company which reports are included in this Transition Report on Form 10-K of Flowers Industries, Inc. /s/ Coopers & Lybrand, L.L.P. Coopers & Lybrand L.L.P. Chicago, Illinois March 27, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FLOWERS INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE TWENTY-SEVEN WEEKS ENDED JANUARY 3, 1998 AND THE FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AT JANUARY 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-03-1998 JUN-29-1997 JAN-03-1998 3,866 0 118,147 0 105,431 252,889 746,663 308,342 899,381 232,612 0 0 0 55,398 293,169 899,381 784,097 786,539 418,926 761,520 0 0 11,796 25,019 9,632 33,448 0 0 (9,888) 23,560 .27 .27
EX-99.1 11 KEEBLER FOODS CO./UB INVESTMENTS FINANCIAL STMTS. 1 EXHIBIT 99.1 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Keebler Foods Company and UB Investments US Inc. and Subsidiaries FINANCIAL STATEMENTS: Page Report of Independent Accountants........................................................................ Consolidated Balance Sheets at January 3, 1998 and December 28, 1996..................................... Consolidated Statements of Operations for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995............................................................... Consolidated Statements of Shareholders' Equity (Deficit) for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995............................................. Consolidated Statements of Cash Flows for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995............................................................... Notes to Consolidated Financial Statements............................................................... FINANCIAL STATEMENT SCHEDULE: Report of Independent Accountants........................................................................ Schedule II - Valuation and Qualifying Accounts..........................................................
Note: The consolidated financial statements of the Company listed in the above index for Keebler include the financial statements of the successor company for the year ended January 3, 1998 and the forty- eight weeks ended December 28, 1996, and the predecessor company for the four weeks ended January 26, 1996, the date on which UB Investments US Inc., the "predecessor company," was acquired by INFLO Holdings Corporation, and the year ended December 30, 1995. The distinction between the successor company's and the predecessor company's consolidated financial statements has been made by inserting a double line between such consolidated financial statements. 2 2 REPORT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY We have audited the accompanying consolidated balance sheets of Keebler Foods Company and Subsidiaries as of January 3, 1998 and December 28, 1996 and the related consolidated statement of operations, shareholders' equity, and cash flows for the year and forty-eight week period then ended. We have also audited the consolidated statements of operations, shareholders' equity, and cash flows of UB Investments US Inc. and Subsidiaries for the four-week period ended January 26, 1996 and the year ended December 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keebler Foods Company and Subsidiaries as of January 3, 1998 and December 28, 1996 and the consolidated results of operations and cash flows of Keebler Foods Company and Subsidiaries for the year ended January 3, 1998 and the forty-eight weeks then ended December 28, 1996 and the consolidated results of operations and cash flows of UB Investments US Inc. and Subsidiaries for the four week period ended January 26, 1996 and the year ended December 30, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 18, 1998 3 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 3, December 28, 1998 1996 ------------ -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 27,188 $ 11,954 Trade accounts and notes receivable, net 98,963 137,150 Inventories, net: Raw materials 25,543 25,296 Package materials 7,306 9,842 Finished goods 78,131 76,054 Other 1,482 1,473 ------------- ------------- 112,462 112,665 Deferred income taxes 42,730 55,929 Other 20,303 19,337 ------------- ------------- Total current assets 301,646 337,035 PROPERTY, PLANT, AND EQUIPMENT, NET 478,121 486,080 TRADEMARKS AND TRADE NAMES, NET 154,146 158,033 GOODWILL, NET 47,059 48,280 PREPAID PENSION 43,060 43,359 ASSETS HELD FOR SALE 3,742 6,785 OTHER ASSETS 15,077 22,502 ------------- ------------- Total assets $ 1,042,851 $ 1,102,074 ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 6 4 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 3, December 28, 1998 1996 ------------------ ------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 26,365 $ 18,570 Trade accounts payable 126,213 96,754 Other liabilities and accruals 194,923 186,893 Income taxes payable 13,784 - Plant and facility closing costs and severance 6,900 19,860 ------------------ ------------------- Total current liabilities 368,185 322,077 LONG-TERM DEBT 272,390 439,369 OTHER LIABILITIES: Deferred income taxes 69,417 64,068 Postretirement/postemployment obligations 60,605 56,382 Plant and facility closing costs and severance 15,578 16,124 Deferred compensation 18,669 18,205 Other 15,956 20,708 ------------------ ------------------- Total other liabilities 180,225 175,487 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 100,000,000 shares authorized and none issued) - - Common stock ($.01 par value; 500,000,000 shares authorized and 77,595,213 and 77,638,206 shares issued, respectively) 776 776 Additional paid-in capital 148,538 148,613 Retained earnings 72,737 15,752 ------------------ ------------------- Total shareholders' equity 222,051 165,141 ------------------ ------------------- Total liabilities and shareholders' equity $ 1,042,851 $ 1,102,074 ================== ===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 7 5 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
KEEBLER FOODS COMPANY UBIUS ---------------------------------- ||---------------------------------- Forty-Eight || Four YEAR ENDED Weeks Ended || Weeks Ended Year Ended JANUARY 3,1998 December 28,1996|| January 26,1996 December 30,1995 ----------------- ----------------|| --------------- ---------------- || NET SALES $ 2,065,184 $ 1,645,532 || $ 101,656 $ 1,578,601 || COSTS AND EXPENSES: || Cost of sales 888,031 774,198 || 54,870 746,754 Selling, marketing, and administrative || expenses 1,026,245 794,837 || 71,427 884,591 Loss on impairment of Salty Snacks || business - - || - 86,516 Other 9,511 6,347 || 857 (1,363) ----------------- ---------------- ||---------------- ---------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 141,397 70,150 || (25,498) (137,897) || Interest (income) from affiliates - - || (875) (11,376) Interest (income) (1,191) (450) || (3) (151) Interest expense to affiliates - - || 664 11,802 Interest expense 35,038 38,921 || 98 27,976 ----------------- ---------------- ||---------------- ---------------- INTEREST EXPENSE (INCOME), NET 33,847 38,471 || (116) 28,251 ----------------- ---------------- ||---------------- ---------------- || INCOME (LOSS) FROM CONTINUING OPERATIONS || BEFORE INCOME TAX EXPENSE (BENEFIT) 107,550 31,679 || (25,382) (166,148) Income tax expense (benefit) 45,169 14,002 || - (459) ----------------- ---------------- ||---------------- ---------------- || INCOME (LOSS) FROM CONTINUING OPERATIONS || BEFORE EXTRAORDINARY ITEM 62,381 17,677 || (25,382) (165,689) || DISCONTINUED OPERATIONS: || Income from operations of discontinued || Frozen Food businesses, net of tax - - || - 7,344 Gain on disposal of Frozen Food || businesses, net of tax - - || 18,910 - ----------------- ---------------- ||---------------- ---------------- || INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 62,381 17,677 || (6,472) (158,345) EXTRAORDINARY ITEM: || Loss on early extinguishment of debt, || net of tax 5,396 1,925 || - - ----------------- ---------------- ||---------------- ---------------- || NET INCOME (LOSS) $ 56,985 $ 15,752 || $ (6,472) $ (158,345) ================= ================ ||================ ================ || BASIC NET INCOME PER SHARE: || Income from continuing operations || before extraordinary item $ 0.80 $ 0.24 || Extraordinary item 0.07 0.03 || --------- --------- || Net income $ 0.73 $ 0.21 || ========= ========= || WEIGHTED AVERAGE SHARES OUTSTANDING 77,604 75,244 || ========= ========= || || DILUTED NET INCOME PER SHARE: || Income from continuing operations || before extraordinary item $ 0.77 $ 0.23 || Extraordinary item 0.07 0.02 || --------- --------- || Net income $ 0.70 $ 0.21 || ========= ========= || WEIGHTED AVERAGE SHARES OUTSTANDING 80,562 76,076 || ========= ========= ||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 8 6 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED -------------------------- PAID-IN EARNINGS SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ------------- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1994 (UBIUS) 1,000 $ 1,000 $ 300,000 $ (535,898) $(234,898) Net loss - - - (158,345) (158,345) Capital contribution from UB Investments (Netherlands) B.V. - - 445,000 - 445,000 ------------- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 30, 1995 (UBIUS) 1,000 1,000 745,000 (694,243) 51,757 Net loss for the four weeks - - - (6,472) (6,472) ------------- ------------ ------------ ------------ ------------ BALANCE AT JANUARY 26, 1996 (UBIUS) 1,000 1,000 745,000 (700,715) 45,285 Write-off of predecessor company equity (1,000) (1,000) (745,000) 700,715 (45,285) Purchase of the Company by INFLO Holdings Corporation effective January 26, 1996 71,656 717 124,284 - 125,001 Management investment 306 2 786 - 788 Issuance of common stock and warrants to Bermore, Limited 5,676 57 23,543 - 23,600 Net income for the forty-eight weeks - - - 15,752 15,752 ------------- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 28, 1996 (KEEBLER FOODS COMPANY) 77,638 776 148,613 15,752 165,141 Purchase of treasury shares (43) - (75) - (75) Net income - - - 56,985 56,985 ------------- ------------ ------------ ------------ ------------ BALANCE AT JANUARY 3, 1998 (KEEBLER FOODS COMPANY) 77,595 $ 776 $ 148,538 $ 72,737 $ 222,051 ============= ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 9 7 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
KEEBLER FOODS COMPANY || UBIUS --------------------------------- || --------------------------------- Forty-Eight || Four YEAR ENDED Weeks Ended || Weeks Ended Year Ended JANUARY 3,1998 December 28,1996 || January 26,1996 December 30,1995 ---------------- ---------------- || ---------------- ---------------- || CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES || Net income (loss) $ 56,985 $ 15,752 || $ (6,472) $ (158,345) Adjustments to reconcile net income (loss) to cash from || operating activities: || Depreciation and amortization 60,708 49,461 || 1,973 47,361 Deferred income taxes 18,548 12,254 || - (1,985) Accretion on Seller Note 2,376 2,246 || - - Loss on early extinguishment of debt, net of tax 3,761 1,925 || - - (Gain) loss on sale of property, plant, and equipment (358) (328) || 33 159 Loss on impairment of the Salty Snacks business, net of tax - - || - 86,516 Gain on the disposal of the Frozen Food businesses, || net of tax - - || (18,910) - Changes in assets and liabilities: || Trade accounts and notes receivable, net 38,187 3,842 || 22,068 (11,716) Accounts receivable/payable from affiliates, net - - || (1,941) (4,737) Inventories, net 203 (9,809) || 4,353 6,605 Recoverable income taxes and income taxes payable 16,113 - || 25 (1,304) Other current assets (966) 1,644 || 1,192 3,772 Deferred debt issue costs (1,344) (8,032) || - - Trade accounts payable and other current liabilities 36,806 26,105 || 11,550 (13,304) Plant and facility closing costs and severance (13,715) (41,279) || - - Restructuring reserves - - || (14,469) (24,122) Other, net 1,044 (553) || 246 9,702 ---------------- ---------------- || ---------------- ---------------- Cash provided from (used by) operating activities 218,348 53,228 || (352) (61,398) || CASH FLOWS (USED BY) PROVIDED FROM INVESTING ACTIVITIES || Capital expenditures (48,429) (29,352) || (3,228) (55,386) Proceeds from property disposals 6,950 9,236 || 644 2,797 Working capital adjustment paid by UB Investment || (Netherlands) B.V. - 32,609 || - - Purchase of Sunshine Biscuits, Inc., net of cash acquired - (142,670) || - - Disposition of the Frozen Food businesses - - || 67,749 - ---------------- ---------------- || ---------------- ---------------- Cash (used by) provided from investing activities (41,479) (130,177) || 65,165 (52,589) || CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES || Purchase of treasury shares/capital contributions (75) 788 || - 445,000 Reduction of notes payable to affiliate - - || - (445,000) Long-term debt borrowings 109,750 220,000 || - - Long-term debt repayments (271,310) (134,000) || (2,377) (30,078) Commercial paper and Revolving Loan facilities, net - - || (63,300) 134,500 ---------------- ---------------- || ---------------- ---------------- Cash (used by) provided from financing activities (161,635) 86,788 || (65,677) 104,422 ---------------- ---------------- || ---------------- ---------------- Increase (decrease) in cash and cash equivalents 15,234 9,839 || (864) (9,565) Cash and cash equivalents at beginning of period 11,954 2,115 || 2,978 12,543 ---------------- ---------------- || ---------------- ---------------- Cash and cash equivalents at end of period $ 27,188 $ 11,954 || $ 2,114 $ 2,978 ================ ================ || ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 10 8 KEEBLER FOODS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- THE CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY (THE "COMPANY", "KEEBLER", OR "SUCCESSOR COMPANY") INCLUDE THE FINANCIAL STATEMENTS OF THE SUCCESSOR COMPANY FOR THE YEAR ENDED JANUARY 3, 1998 AND THE FORTY-EIGHT WEEK PERIOD ENDED DECEMBER 28, 1996, AND UB INVESTMENTS US INC. ("UBIUS" OR "PREDECESSOR COMPANY") FOR THE FOUR WEEK PERIOD ENDED JANUARY 26, 1996, THE DATE ON WHICH UBIUS WAS ACQUIRED BY INFLO, AND THE YEAR ENDED DECEMBER 30, 1995. THE DISTINCTION BETWEEN THE CONSOLIDATED FINANCIAL STATEMENTS OF THE SUCCESSOR COMPANY AND PREDECESSOR COMPANY HAS BEEN MADE BY INSERTING A DOUBLE LINE BETWEEN SUCH CONSOLIDATED FINANCIAL STATEMENTS AND RELATED FOOTNOTES. 1. BASIS OF PRESENTATION BUSINESS AND OWNERSHIP Keebler Foods Company, a manufacturer and distributor of food products, was acquired by INFLO Holdings Corporation ("INFLO") on January 26, 1996. INFLO was owned by Artal Luxembourg S. A. ("Artal"), a private investment company, Flowers Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company, Bermore, Limited ("Bermore"), a privately held corporation and the parent of G.F. Industries, Inc. ("GFI"), and certain members of the Company's current management. On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger"), and subsequently changed its name to Keebler Foods Company. The financial statements as of and for all periods subsequent to January 26, 1996 have been restated to reflect the Merger as if it had been effective January 26, 1996. INFLO was legally established as of November 2, 1995, but did not have any operating activity, assets, or liabilities until the Keebler acquisition on January 26, 1996. The Company is comprised of primarily the following wholly-owned subsidiaries: Keebler Company, Bake-Line Products, Inc., Johnston's Ready Crust Company, Sunshine Biscuits, Inc. ("Sunshine"), Keebler Leasing Corp., Hollow Tree Company, L.L.C., Hollow Tree Financial Company, L.L.C., and Elfin Equity Company, L.L.C. The Company, formerly UBIUS, had previously been owned by UB Investments (Netherlands) B.V., a Dutch company (See Note 4). UB Investments (Netherlands) B.V. is a member of the worldwide group of affiliated companies owned by United Biscuits (Holdings) plc., a publicly held company in the United Kingdom. FISCAL YEAR The Company's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The 1997 fiscal year consists of fifty-three weeks. As a result of the Keebler acquisition, which closed on the last day of the first four week period of 1996, the fiscal year for 1996 consisted of the forty-eight weeks ended December 28, 1996. The 1995 fiscal year of the predecessor company was comprised of fifty-two weeks. PRINCIPLES OF CONSOLIDATION All subsidiaries are wholly-owned and included in the consolidated financial statements of the Company. Intercompany accounts and transactions have been eliminated. GUARANTEES OF NOTES The subsidiaries of the Company that are not Guarantors of the Senior Subordinated Notes are inconsequential (which means that the total assets, revenues, income, or equity of such non-guarantors, both individually and on a combined basis, is less than 3% of the Company's consolidated assets, revenues, income, or equity), individually and in the aggregate, to the consolidated financial statements of the Company. The Guarantees are full, unconditional, and joint and several. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors in the Senior Subordinated Notes. 11 9 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) RECLASSIFICATIONS Certain reclassifications of prior years' data have been made to conform with the current year reporting. 2. ACQUISITION OF KEEBLER FOODS COMPANY BY INFLO HOLDINGS CORPORATION On January 26, 1996, UB Investments (Netherlands) B.V. sold all the stock of UBIUS to INFLO. Subsequent to the acquisition, UBIUS changed its name to Keebler Corporation. On November 20, 1997, INFLO was merged into Keebler Corporation and subsequently changed its name to Keebler Foods Company. The sale specifically excluded the stock of the Frozen Food businesses as well as the Salty Snacks business conducted by Keebler Company and other subsidiaries of UBIUS, as well as the UBIUS finance companies of U.B.H.C., Inc. and U.B.F.C., Inc., also wholly-owned subsidiaries (See Note 4). The aggregate gross purchase price of $487.5 million (excluding fees and expenses paid at closing of approximately $15.3 million) was financed by $125.0 million in equity from INFLO, $200.0 million in Senior Term Notes, $125.0 million in Increasing Rate Notes, the assumption of $20.3 million in existing senior indebtedness of the Company, and a note payable ("Seller Note") by INFLO to UB Investments (Netherlands) B.V. for $32.5 million. The Seller Note does not bear interest until January 26, 1999, and has been accounted for at a discounted value of $24.4 million. In addition, the Company, subsequent to the purchase by INFLO, received a working capital adjustment of $32.6 million from United Biscuits (Netherlands) B.V. pursuant to the terms of the stock purchase agreement between INFLO and United Biscuits (Netherlands) B.V. The Keebler acquisition has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of the Company based on the respective fair values. The following provides an allocation of the purchase price:
(IN MILLIONS) Purchase Price.................................................................................. $ 487.5 Less: Net book value of assets acquired......................................................... 329.5 Less: Asset purchase price allocation - Working capital receivable from UB (Netherlands) B.V........................................ $ 32.6 - Inventories................................................................................. 4.4 - Deferred income taxes....................................................................... 11.4 - Property, plant, and equipment.............................................................. 45.7 - Prepaid pension............................................................................. 33.1 - Other assets................................................................................ (14.2) - Trademarks and trade names.................................................................. 104.0 217.0 -------- Plus: Liability purchase price allocation - Other current liabilities and accruals...................................................... 1.1 - Plant and facility closing costs and severance.............................................. 55.3 - Deferred income taxes....................................................................... 13.8 - Postretirement/postemployment obligations................................................... (17.5) - Other....................................................................................... 6.3 59.0 -------- -------- Unallocated excess purchase price over fair value of net assets acquired............................................................................... $ 0.0 ========
See Note 3 for the unaudited pro forma consolidated results of operations of the Keebler acquisition. 12 10 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITION OF SUNSHINE BISCUITS, INC. On June 4, 1996, the Company acquired Sunshine from GFI for an aggregate consideration of $171.7 million (excluding related fees and expenses paid at closing of approximately $2.2 million). The Sunshine acquisition was funded by $150.3 million in cash, of which $36.3 million was provided by the Company's existing cash sources and $114.0 million in borrowings under the Amended and Restated Credit Agreement (See Note 9). In addition, approximately $23.6 million of common stock and warrants were issued to GFI and was accounted for as a capital contribution. Subsequent to the Merger, the stock and warrants held by GFI were transferred to Bermore and reissued for the same value in the name of the Company. These shares and warrants represented 13.1% of the Company's common stock on a fully diluted basis. The Sunshine acquisition by the Company has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of Sunshine based on the respective fair values. The acquisition resulted in goodwill of $48.8 million, which is being amortized over a forty year period. The following provides an allocation of the purchase price:
(IN MILLIONS) Purchase Price.................................................................................... $171.7 Less: Net book value of assets acquired........................................................... 92.8 Less: Asset purchase price allocation - Trade accounts receivable..................................................................... $ 0.3 - Inventories................................................................................... 3.6 - Deferred income taxes......................................................................... 8.4 - Property, plant, and equipment................................................................ 9.5 - Other assets.................................................................................. (3.8) - Trademarks and trade names.................................................................... 57.0 75.0 ------- Plus: Liability purchase price allocation - Other current liabilities and accruals........................................................ 8.4 - Plant and facility closing costs and severance................................................ 22.1 - Deferred income taxes......................................................................... (8.3) - Pension obligation............................................................................ 5.0 - Postretirement/postemployment obligations..................................................... 17.8 - Other......................................................................................... (0.1) 44.9 ------- ------- Unallocated excess purchase price over fair value of net assets acquired.......................... $ 48.8 =======
Results of operations for Sunshine from June 4, 1996 to December 28, 1996 have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place at January 1, 1995. The unaudited pro forma information includes adjustments for interest expense that would have been incurred to finance the purchase, additional depreciation of the property, plant, and equipment acquired, and amortization of the trademarks, trade names, and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been had the Keebler and Sunshine acquisitions been effected on the assumed date.
----------------------------------- Unaudited For The Year Ended ----------------------------------- December 28, December 30, 1996 1995 --------------- --------------- (IN THOUSANDS) Net sales....................................................................... $ 1,979,105 $ 2,213,574 Loss from continuing operations before income taxes............................. $ (10,894) $ (241,323) Net loss........................................................................ $ (6,793) $ (253,924)
13 11 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. PREDECESSOR COMPANY UBIUS, the predecessor company to Keebler Foods Company, was formed in 1992 as a result of the legal restructuring of United Biscuit (Holdings) plc.'s operations in the United States. UBIUS received the stock of the subsidiaries in exchange for the $850 million in debt with UB Investments (Netherlands) B.V. as well as all of the capital stock of UBIUS. On May 20, 1995, the predecessor company adopted plans to sell the Salty Snacks business. On January 24, 1996, the predecessor company sold to Kelly Food Products, Inc. selected assets of the Salty Snacks business including the production plant in Bluffton, Indiana, trademarks and other intangibles related to the business, inventory, and property, plant, and equipment, including selected assets related to the convenience sales division. During July 1995, the predecessor company adopted plans to discontinue the operations of its Frozen Food businesses. On January 9, 1996, UB Investments (Netherlands) B.V. sold the assets and stock of Bernardi Italian Foods Co., The Original Chili Bowl, Inc., Chinese Food Processing Corporation (wholly-owned subsidiaries collectively known as the Frozen Food businesses), and certain assets of Keebler Company to Windsor Food Company Ltd. The sale was effective as of December 31, 1995. On December 5, 1995, Shaffer, Clarke & Co., Inc. ("Shaffer, Clarke"), formerly a wholly-owned subsidiary, sold certain assets related to Shaffer, Clarke's KA-ME business to Liberty Richter, Inc. for a gain of $2.6 million. These assets included inventory, contractual rights, and other intellectual property. 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS All highly liquid instruments purchased with an original maturity of three months or less are classified as cash equivalents. The carrying amount of cash equivalents approximates fair value due to the relatively short maturity of these investments. TRADE ACCOUNTS RECEIVABLE Substantially all of the Company's trade accounts receivable are from retail dealers and wholesale distributors. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Trade accounts receivable, as shown on the consolidated balance sheets, were net of allowances of $5.0 million as of January 3, 1998 and $5.4 million as of December 28, 1996. INVENTORIES Inventories are stated at the lower of cost or market with cost determined principally by the last-in, first-out ("LIFO") method. Inventories stated under the LIFO method represent approximately 88% of total inventories at January 3, 1998 and 91% of total inventories at December 28, 1996. Because the Company has adopted a natural business unit single pool approach to determining LIFO inventory cost, classification of the LIFO reserve by inventory component is impractical. The excess of the current production cost of inventories over LIFO cost was approximately $2.2 million at January 3, 1998. There was no reserve required at December 28, 1996 to state inventory on a LIFO basis. At January 3, 1998 and December 28, 1996, inventories are shown net of an allowance for slow-moving and aged inventory of $6.8 million and $5.5 million, respectively. 14 12 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is stated at cost. Depreciation expense is computed using the straight-line method based on the estimated useful lives of the depreciable assets. Certain facilities and equipment held under capital leases are classified as property, plant, and equipment and amortized using the straight-line method over the lease terms, and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense. TRADEMARKS AND TRADE NAMES Trademarks and trade names are stated at cost and are amortized on a straight-line basis over a period of forty years. Accumulated amortization of trademarks and trade names was $7.1 million and $3.1 million at January 3, 1998 and December 28, 1996, respectively. GOODWILL Goodwill shown in the consolidated financial statements at January 3, 1998 and December 28, 1996 is related to the excess cost over the fair value of the tangible net assets acquired from the Sunshine purchase (See Note 3). Goodwill is amortized on a straight-line basis over a period of forty years. Accumulated amortization of goodwill was $1.8 million and $0.5 million at January 3, 1998 and December 28, 1996, respectively. RESEARCH AND DEVELOPMENT Activities related to new product development and major improvements to existing products and processes are expensed as incurred and were $10.2 million for the year ended January 3, 1998, $4.3 million for the forty-eight weeks ended December 28, 1996, $0.6 million for the four weeks ended January 26, 1996, and $14.5 million for the year ended December 30, 1995. ADVERTISING AND CONSUMER PROMOTION Advertising and consumer production costs are generally expensed when incurred or no later than when the advertisement appears or the event is run. Advertising and consumer promotion expense was $67.6 million for the year ended January 3, 1998, $33.3 million for the forty-eight weeks ended December 28, 1996, $5.1 million for the four weeks ended January 26, 1996, and $87.9 million for the year ended December 30, 1995. There were no deferred advertising costs at January 3, 1998 and December 28, 1996. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into derivative financial transactions to hedge existing or future exposures to changes in commodity prices. The Company does not enter into derivative transactions for speculative purposes. Gains and losses on commodity futures and options transactions are deferred in inventory until the contracts are liquidated (See Note 20). INCOME TAXES The consolidated financial statements reflect the application of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes". The Company files a consolidated federal income tax return. 15 13 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share". The consolidated financial statements reflect the application of SFAS No. 128 which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options and warrants. Diluted earnings per share is similar to fully diluted earnings per share. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company determines whether there has been an impairment of long-lived assets and the related unamortized goodwill, based on whether certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost of any long-lived assets and the related unamortized goodwill may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. 6. PROPERTY, PLANT, AND EQUIPMENT A summary of property, plant, and equipment, including related accumulated depreciation follows:
JANUARY 3, 1998 December 28, 1996 ---------------------- ---------------------- (IN THOUSANDS) Land.............................................................. $ 16,487 $ 16,344 Buildings......................................................... 130,241 126,824 Machinery and equipment........................................... 328,473 301,588 Office furniture and fixtures..................................... 56,559 54,985 Delivery equipment................................................ 6,946 6,785 Construction in progress.......................................... 38,080 23,980 ---------------------- ---------------------- 576,786 530,506 Accumulated depreciation.......................................... (98,665) (44,426) ---------------------- ---------------------- $ 478,121 $ 486,080 ====================== ======================
16 14 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PROPERTY, PLANT, AND EQUIPMENT (CONTINUED) Property, plant, and equipment is depreciated on a straight-line basis over the estimated useful lives of the depreciable assets. Buildings are depreciated over a useful life of ten to forty years. Machinery and equipment is depreciated over a useful life of five to twenty-five years. Office furniture and fixtures are depreciated over a useful life of three to fifteen years. Delivery equipment is depreciated over a useful life of two to twelve years. 7. ASSETS HELD FOR SALE In 1996, as part of the Keebler and Sunshine acquisitions, management executed a strategic plan to reduce inefficiencies and excess capacity by closing the manufacturing facilities in Atlanta, Georgia and Santa Fe Springs, California. In 1997, a distribution center in Kensington, Connecticut was also held for sale. The Santa Fe Springs, California facility was subsequently sold on March 27, 1997 with no gain or loss recognized. Disposition of the Atlanta, Georgia manufacturing facility and the Kensington distribution center is expected to occur before the end of 1998 without a significant gain or loss. 8. OTHER CURRENT LIABILITIES AND ACCRUALS Other current liabilities and accruals consisted of the following at January 3, 1998 and December 28, 1996:
JANUARY 3, 1998 December 28, 1996 ---------------------- ------------------------ (IN THOUSANDS) Self insurance reserves........................................... $ 55,185 $ 58,527 Employee compensation............................................. 55,724 42,555 Marketing and consumer promotions................................. 52,838 45,892 Other............................................................. 31,176 39,919 ---------------------- ------------------------ $ 194,923 $ 186,893 ====================== ========================
The Company obtains insurance to manage potential losses and liabilities related to workers' compensation, health and welfare claims, and general product and vehicle liability. The Company has elected to retain a significant portion of the expected losses through the use of deductibles and stop-loss limitations. Provisions for losses expected under these programs are recorded based on the Company's estimates of aggregate liability for claims incurred. These estimates utilize the Company's prior experience and actuarial assumptions provided by the Company's insurance carrier. The total estimated liability for these losses at January 3, 1998 and December 28, 1996 was $55.2 million and $58.5 million, respectively, and is included in other current liabilities and accruals. The Company has collateralized its liability for potential self-insurance losses in several states by obtaining standby letters of credit which aggregate to approximately $17.0 million. 17 15 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. DEBT AND LEASE COMMITMENTS Long-term debt consisted of the following at January 3, 1998 and December 28, 1996:
Interest Rate Final Maturity JANUARY 3, 1998 December 28, 1996 ---------------- ------------------ ------------------- ------------------- (IN THOUSANDS) Term-A Loans................... 6.683% April 7, 2003 $ 156,000 $ 132,875 Term-B Loans................... 7.880-8.375% July 31, 2003 -- 89,400 Term-C Loans................... 8.130-8.625% July 31, 2004 -- 64,575 Senior Subordinated Notes...... 10.750% July 1, 2006 125,000 125,000 Seller Note.................... 10.000% January 26, 2007 -- 26,664 Other Senior Debt.............. various 2001-2005 12,645 14,290 Capital Lease Obligations...... various 2004-2005 5,110 5,135 ------------------- ------------------- 298,755 457,939 Less: Current maturities....... 26,365 18,570 ------------------- ------------------- $ 272,390 $ 439,369 =================== ===================
At January 3, 1998, the Company's primary credit financing was provided by a $380.0 million Second Amended and Restated Credit Agreement ("Credit Agreement") consisting of a $140.0 million Revolving Loan facility and a $240.0 million Term Loan of which the current outstanding balance was $156.0 million with quarterly scheduled principal payments through the final maturity in April 2003. The amendment to the Credit Agreement was entered into on April 8, 1997 in order to obtain more favorable terms, fees, and interest rates. The available balance on the Revolving Loan facility as of January 3, 1998, was $140.0 million. Actual available borrowings under the Revolving Loan facility can be reduced by the level of qualifying working capital as defined in the Credit Agreement. This gross available balance is further reduced by certain letters of credit totaling $9.9 million and outstanding borrowings. There were no amounts outstanding under this facility as of January 3, 1998. Any unused borrowings under the Revolving Loan facility are subject to a commitment fee, which will vary from 0.125%-0.375% based on the relationship of debt to adjusted earnings. Interest on the Revolving Loan facility and Term Loan is calculated based on a base rate plus applicable margin. The base rate can, at the Company's option, be 1) the higher of the base domestic lending rate as established by the Administrative Agent for the Lenders under the Credit Agreement, or the Federal Funds Rate plus one-half of one-percent, or 2) a reserve percentage adjusted LIBO Rate as offered by the Administrative Agent's office in London. Base rate loan interest rates fluctuate immediately based upon a change in the established base rate by the Administrative Agent. The Credit Agreement requires the Company to meet certain financial covenants including net worth; earnings before interest, taxes, depreciation, and amortization; and cash flow and interest coverage ratios. During the fourth quarter of 1997, using existing cash resources, the Company pre-paid $70.0 million of principal on the Term Loan; $30.0 million on December 8, 1997 and $40.0 million on November 10, 1997. The pre-payments resulted in the recognition of a $1.1 million after-tax extraordinary charge related to the expensing of certain unamortized bank fees which were incurred at the time the Term Loan was issued. On November 21, 1997, the Company settled the Seller Note with a payment of $31.7 million funded through working capital. The Company assumed the $32.5 million Seller Note, previously held by INFLO, as a result of the Merger. The Seller Note did not bear interest until January 26, 1999 and was recorded at a discounted value of $24.4 million on January 26, 1996. The discount was being amortized over three years at an effective interest rate of 10.0%. The Company recorded a before-tax extraordinary charge of $2.6 million on the early extinguishment of debt. The related after-tax charge was $1.6 million. 18 16 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. DEBT AND LEASE COMMITMENTS (CONTINUED) In conjunction with the amendment to the Credit Agreement on April 8, 1997, Term Loans B and C were extinguished using $40.0 million of borrowings under the Revolving Loan facility, $109.8 million of increased borrowings against Term Loan A, and $3.8 million from cash resources. The Company recorded a before-tax extraordinary charge of $4.6 million related primarily to expensing certain unamortized bank fees which were incurred at the time Term Loans B and C were issued. The related after-tax charge was $2.7 million. On October 23, 1996, pursuant to an exchange and registration rights agreement, the Company registered its 10.75% Senior Subordinated Notes due 2006 (the "Notes") under the Securities Act of 1933 in exchange for previously held Increasing Rate Notes. The Notes were issued under an indenture dated June 15, 1996 between the Company, the Company's Restricted Subsidiaries (as defined in the indenture), and the U.S. Trust Company of New York, as trustee. The Notes are unsecured, senior subordinated obligations of the Company guaranteed by the Restricted Subsidiaries. Interest on the Notes is paid semi-annually on January 1 and July 1 of each year, commencing January 1, 1997. At the Company's option, up to 35.0% of the aggregate original principal of the Notes can be redeemed at a redemption price of 110.0% on or prior to July 1, 1999 following a public equity offering. In addition, the Company's ability to pay dividends or make other distributions on its common stock is limited by the terms of the indenture governing the Notes to an amount equal to 50% of the consolidated net income of the Company for the relevant period, subject to other limitations. The Increasing Rate Notes, issued to finance the Keebler acquisition, were repaid in June 1996 with the proceeds from a private placement offering for the 10.75% Senior Subordinated Notes due in 2006. The Company recorded a before-tax extraordinary loss of $3.2 million on the early extinguishment of the Increasing Rate Notes. The loss consisted primarily of bank fees incurred at the time the Increasing Rate Notes were issued. The after-tax loss was $1.9 million. On January 30, 1996, the Company entered into a swap transaction with the Bank of Nova Scotia, who also serves as the Administrative Agent for the Lenders under the Credit Agreement. The swap transaction had the effect of converting the base rate on $170.0 million of the Term Loans to a fixed rate obligation of 5.0185% plus applicable margin through February 1, 1999. The maturity date on the swap transaction can be extended to February 1, 2001 at the option of the Bank of Nova Scotia on January 28, 1999. Interest of $39.0 million, $25.2 million, $3.8 million, and $37.6 million was paid on debt for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995, respectively. Aggregate scheduled annual maturities of long-term debt as of January 3, 1998 are as follows: (IN THOUSANDS) 1998............................................... $ 26,365 1999............................................... 32,575 2000............................................... 32,990 2001............................................... 34,455 2002............................................... 34,225 2003 and thereafter................................ 138,145 ------------ $ 298,755 ============
19 17 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. DEBT AND LEASE COMMITMENTS (CONTINUED) Assets recorded under capitalized lease agreements included in property, plant, and equipment consist of the following: JANUARY 3, December 28, 1998 1996 ------------ ------------ (IN THOUSANDS) Land..................................... $ 1,209 $ 1,209 Buildings................................ 2,165 2,881 Machinery and equipment.................. 1,740 6,361 Other leased assets...................... -- 259 ------------ ------------ 5,114 10,710 Accumulated amortization................. (527) (1,000) ------------ ------------ $ 4,587 $ 9,710 ============ ============
Future minimum lease payments under scheduled capital and operating leases that have initial or remaining noncancellable terms in excess of one year are as follows:
Capital Operating Leases Leases ------------ ------------- (IN THOUSANDS) 1998......................................... $ 243 $ 29,128 1999......................................... 263 24,330 2000......................................... 333 21,654 2001......................................... 351 17,603 2002......................................... 393 14,497 2003 and thereafter.......................... 5,401 33,071 ------------ ------------- Total minimum payments....................... 6,984 $ 140,283 ============= Amount representing interest................. (1,874) ------------ Obligations under capital lease.............. 5,110 Obligations due within one year.............. (25) ------------ Long-term obligations under capital leases... $ 5,085 ============
Rent expense for all operating leases was $36.1 million, $30.1 million, $2.7 million, and $37.4 million for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995, respectively. 10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE As part of acquiring Keebler and Sunshine, management adopted and began executing a plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4 million were provided for in the allocation of the purchase price of both the Keebler and Sunshine acquisitions. Management's plan included company-wide staff reductions, the closure of manufacturing, distribution, and sales force facilities, and information system exit costs. 20 18 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED) Severance, outplacement, and other related costs associated with staff reductions were estimated at $30.7 million. Costs incurred related to the closing of manufacturing, distribution, and sales force facilities, which include primarily severance and lease termination and carrying costs, were expected to total $39.9 million. In addition, the Company expects to incur $6.8 million in lease costs related to exiting legacy information systems. Spending against the reserves established for the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996 totaled $16.2 million and $41.4 million, respectively. During the year ended January 3, 1998, the Company also provided an additional $2.7 million principally for anticipated costs related to the closure of distribution facilities not included in the original plan to reduce costs and inefficiencies. No additional provisions were made during the forty-eight weeks ended December 28, 1996. At January 3, 1998 and December 28, 1996, the plant and facility closing costs and severance reserve balance was $22.5 million and $36.0 million, respectively. The plans initiated by management are expected to be completed prior to the end of 1998. Only noncancellable lease obligations are expected to extend beyond 1998, to be paid out over the next seven years concluding in 2004. 11. EMPLOYEE BENEFIT PLANS The Retirement Plan for Salaried and Certain Hourly-Paid Employees of Keebler Company (the "pension plan") is a trusteed, noncontributory, defined-benefit, pension plan. The pension plan covers certain salaried and hourly-paid employees. Assets held by the pension plan consist primarily of common stocks, collective trust funds, government securities, bonds, and guaranteed insurance contracts. Benefits provided under the pension plan are primarily based on years of service and the employee's final level of compensation. The Company's funding policy is to contribute annually not less than the ERISA minimum funding requirements. Effective January 1, 1997, the pension plans of Sunshine Biscuits, Inc., Athens Packaging, Bake-Line Products, Inc., and Emerald Industries were merged with the Company's pension plan. Pension expense included the following components:
Forty-Eight || Four Weeks YEAR ENDED Weeks Ended || Ended Year Ended JANUARY 3, December 28, || January 26, December 30, 1998 1996 || 1996 1995 --------------- ----------------- || --------------- ---------------- (IN THOUSANDS) || || || Service cost............................... $ 8,560 $ 7,711 || $ 599 $ 6,611 Interest cost.............................. 29,673 21,338 || 1,133 13,877 Actual return on plan assets............... (63,745) (12,752) || (1,693) (43,661) Net amortization of transition obligation.. -- -- || 47 616 Deferral of gains (losses)................. 25,810 (15,495) || -- 24,468 Prior service cost......................... -- -- || (12) (155) Net gain................................... -- -- || -- (437) --------------- ----------------- || ---------------- ---------------- Pension expense............................ $ 298 $ 802 || $ 74 $ 1,319 =============== ================= || ================ ================
21 19 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFIT PLANS (CONTINUED) The funded status of the Company's pension plan and amounts recognized in the consolidated balance sheets are as follows:
JANUARY 3, 1998 December 28, 1996 ------------------- --------------------- (IN THOUSANDS) Actuarial present value of accumulated benefit obligation: Vested.............................................................. $ (392,512) $ (366,253) Nonvested........................................................... (20,983) (7,255) ------------------- --------------------- $ (413,495) $ (373,508) =================== ===================== Projected benefit obligation.......................................... $ (437,334) $ (408,060) Plan assets at fair value............................................. 499,379 464,433 ------------------- --------------------- Plan assets greater than projected benefit obligation................. 62,045 56,373 Unrecognized transition obligation.................................... -- -- Unrecognized prior service............................................ 5,044 -- Unrecognized net gain................................................. (24,029) (13,014) ------------------- --------------------- Prepaid pension....................................................... $ 43,060 $ 43,359 =================== =====================
Assumptions used in accounting for the pension plan at each of the respective period-ends are as follows:
Forty-Eight || Four Weeks YEAR ENDED Weeks Ended || Ended Year Ended JANUARY 3, December 28, || January 26, December 30, 1998 1996 || 1996 1995 -------------- ---------------- || --------------- --------------- || || Discount rate..................................... 7.3% 7.5% || 7.5% 7.5% Rate of compensation level increases.............. 4.0 4.0 || 4.0 4.0-6.0 Expected long-term rate of return on plan assets.. 9.0 8.6 || 10.0 8.0-9.0
The plan assets, as of January 3, 1998 and December 28, 1996, include a real estate investment of $3.1 million in a distribution center which is under an operating lease to the Company. The Company, in addition to the pension plan, also maintains an unfunded supplemental retirement plan for certain highly compensated former executives. Benefits provided are based on years of service. Vesting is graduated depending on termination after age 55. The supplemental retirement plan expense includes the following components:
Forty-Eight || Four Weeks YEAR ENDED Weeks Ended || Ended Year Ended JANUARY 3, December 28, || January 26, December 30, 1998 1996 || 1996 1995 ------------ ------------ || ------------ ------------ (IN THOUSANDS) || || Service cost............................... $ -- $ -- || $ 35 $ 452 Interest cost.............................. 732 637 || 66 854 Net amortization of transition obligation.. -- -- || 8 111 Prior service cost......................... -- -- || 13 170 ------------ ------------ || ------------ ------------ Plan expense............................... $ 732 $ 637 || $ 122 $ 1,587 ============ ============ || ============ ============
22 20 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFIT PLANS (CONTINUED) The unfunded status of the supplemental retirement plan and the amounts recognized in the consolidated balance sheets are as follows:
JANUARY 3, December 28, 1998 1996 --------------- ----------------- (IN THOUSANDS) Actuarial present value of accumulated benefit obligation: Vested..................................................................... $ (10,303) $ (10,028) Nonvested.................................................................. -- -- --------------- ----------------- $ (10,303) $ (10,028) =============== ================= Projected benefit obligation................................................. $ (10,097) $ (9,890) Plan assets at fair value.................................................... -- -- --------------- ----------------- Projected benefit obligation in excess of plan assets........................ (10,097) (9,890) Unrecognized transition obligation........................................... -- -- Unrecognized prior service cost.............................................. -- -- Unrecognized net (gain) loss................................................. (458) (754) --------------- ----------------- Plan obligation included in other liabilities................................ $ (10,555) $ (10,644) =============== =================
Assumptions used in accounting for the supplemental retirement plan at each of the respective period-ends are as follows:
Forty-Eight || Four Weeks YEAR ENDED Weeks Ended || Ended Year Ended JANUARY 3, December 28, || January 26, December 30, 1998 1996 || 1996 1995 -------------- ---------------- || --------------- --------------- || Discount rate............................. 7.3% 7.5% || 7.5% 7.5% Rate of compensation level increase....... N/A N/A || 4.0 4.0
Contributions are also made by the Company to a retirement program for Grand Rapids union employees. Benefits provided under the plan are based on a flat monthly amount for each year of service and are unrelated to compensation. Contributions are made based on a negotiated hourly rate. For the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995, the Company expensed contributions of $2.6 million, $2.3 million, $0.2 million, and $2.5 million, respectively. The Company contributes to various multiemployer union administered defined-benefit and defined-contribution pension plans. Benefits provided under the multiemployer pension plans are generally based on years of service and employee age. Expense under these plans was $10.5 million, $7.8 million, $0.9 million, and $9.6 million for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995, respectively. The Company also offers certain employees participation in the Keebler Company Salaried Savings Plan, a defined-contribution plan. Prior to July 1, 1995, certain nonunion employees who met length-of-service requirements could elect to participate in the plan. Currently, participation in the plan can be elected immediately. Contributions made by participants are based on an elected percentage of the participants' compensation within a specified range. Beginning in 1997, a matching program was established whereby the Company makes a contribution ranging from zero to fifty cents, depending on Company performance, for every before-tax dollar contributed by the employee, up to 6% of the employees' eligible pay. The Company's matching contribution was $3.1 million for 1997. There 23 21 was no Company matching contribution prior to 1997. Expenses incurred by the Company to administer the plan were nominal. 24 22 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFIT PLANS (CONTINUED) During 1996, the Company matched a portion of employee contributions to a defined contribution savings plan for qualified salaried employees of Sunshine. Contributions made by the Company were not to exceed 6% of gross wages. The Company also provided a savings plan for certain hourly employees of Sunshine which provided no matching company contributions. Expenses in 1996 for the plans were nominal. Effective January 1, 1997, all Sunshine employees became eligible for the Keebler Company Salaried Savings Plan, thus terminating the Sunshine plans. A Voluntary Employee Beneficiary Association ("VEBA") provided health and welfare benefits for certain Sunshine employees. Payments were made by the Company to the VEBA to fund employee health and welfare claims. The Company funded $6.6 million and $10.0 million during the year ended January 3, 1998 and the forty-eight weeks ended December 28, 1996, respectively. In July 1997, the Company integrated all Sunshine employees into the existing Keebler Welfare Benefit Plan and no further VEBA payments were made. Prior to 1997, Bake-Line Products, Inc. administered a money purchase pension plan for certain hourly and salaried employees. Contributions were based on 4% of employees' annual salary. Effective January 1, 1997, the Bake-Line money purchase pension plan was merged into the Company's pension plan. Expenses paid to administer the Bake-Line money purchase pension plan were nominal. 12. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS The Company provides certain medical and life insurance benefits for eligible retired employees. The medical plan, which covers nonunion employees with ten or more years of service, is a comprehensive indemnity-type plan. The plan incorporates an up-front deductible, coinsurance payments, and employee contributions which are based on length of service. The life insurance plan offers a small amount of coverage versus the amount the employees had while employed. The Company does not fund the plan. The net periodic postretirement benefit expense includes the following components:
Forty-Eight || Four YEAR ENDED Weeks Ended || Weeks Ended Year Ended JANUARY 3, December 28, || January 26, December 30, 1998 1996 || 1996 1995 ------------- -------------- || ------------- --------------- (IN THOUSANDS) || || Service cost.................................. $ 2,242 $ 2,142 || $ 123 $ 1,598 Interest cost................................. 3,888 2,729 || 246 3,194 ------------- -------------- || ------------- --------------- Net periodic postretirement benefit expense... $ 6,130 $ 4,871 || $ 369 $ 4,792 ============= ============== || ============= ===============
The unfunded status of the plan reconciled to the postretirement obligation in the Company's consolidated balance sheets are as follows:
JANUARY 3, 1998 December 28, 1996 ---------------------- ---------------------- (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees...................................................... $ (35,981) $ (33,054) Fully eligible active participants............................ (7,154) (8,579) Other active participants..................................... (12,941) (11,815) ---------------------- ---------------------- (56,076) (53,448) Unrecognized prior service cost................................. (689) -- Unrecognized net gain........................................... (4,215) (3,857) ---------------------- ---------------------- Postretirement obligation....................................... $ (60,980) $ (57,305) ====================== ======================
25 23 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED) The accumulated postretirement benefit obligation was determined using a weighted-average discount rate of 7.3% for the year ended January 3, 1998, and 7.5% for the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995. The weighted-average annual assumed rate of increase in the cost of covered benefits is 7.0% for 1997 declining gradually to an ultimate trend rate of 5.0% by the year 1999. A 1% increase in the trend rate for health care costs would have increased the accumulated benefit obligation as of January 3, 1998 by $2.4 million and the net periodic benefit cost by $0.5 million. The Company also provides postemployment medical benefits to employees on long-term disability. The plan is a comprehensive indemnity-type plan which covers nonunion employees on long-term disability. There is no length of service requirement. The plan incorporates coinsurance payments and deductibles. The Company does not fund the plan. The postemployment obligation included in the consolidated balance sheets at January 3, 1998 and December 28, 1996 was $4.7 million and $4.6 million, respectively. 13. INCOME TAXES The components of income tax expense (benefit) were as shown below:
Forty-Eight || Four Weeks YEAR ENDED Weeks Ended || Ended Year Ended JANUARY 3, December 28, || January 26, December 30, 1998 1996 || 1996 1995 --------------- ----------------|| --------------- ---------------- (IN THOUSANDS) || Current: || Federal....................................... $ 22,172 $ -- || $ -- $ 1,526 State......................................... 3,840 -- || -- -- --------------- ----------------|| --------------- ---------------- Current provision for income taxes.............. 26,012 -- || -- 1,526 Deferred: || Federal....................................... 17,203 11,524 || 6,490 (63,212) State......................................... 1,954 2,478 || 843 (9,215) Valuation allowance (federal and state)....... -- -- || (7,333) 70,442 --------------- ----------------|| --------------- ---------------- Deferred provision (benefit) for income taxes... 19,157 14,002 || -- (1,985) --------------- ----------------|| --------------- ---------------- $ 45,169 $ 14,002 || $ -- $ (459) =============== ================|| =============== ================
26 24 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. INCOME TAXES (CONTINUED) The differences between the income tax expense (benefit) calculated at the federal statutory income tax rate and the Company's consolidated income tax expense (benefit) are as follows:
Forty-Eight || Four Weeks YEAR ENDED Weeks Ended || Ended Year Ended JANUARY 3, December 28, || January 26, December 30, 1998 1996 || 1996 1995 -------------- -------------- || -------------- -------------- (IN THOUSANDS) || U.S. federal statutory rate................ $ 37,643 $ 11,140 || $ -- $ (64,843) State income taxes (net of federal benefit) 3,766 1,608 || -- (8,208) Deferred tax asset valuation adjustment.... -- -- || -- 70,442 Intangible amortization.................... 1,836 1,268 || -- 828 Non-taxable items.......................... 1,076 (14) || -- 883 All others................................. 848 -- || -- 439 -------------- -------------- || -------------- -------------- $ 45,169 $ 14,002 || $ -- $ (459) ============== ============== || ============== ==============
The deferred tax assets and deferred tax (liabilities) recorded on the consolidated balance sheets consist of the following:
JANUARY 3, 1998 December 28, 1996 -------------------- -------------------- (IN THOUSANDS) Depreciation....................................................... $ (82,204) $ (91,860) Prepaid pension.................................................... (16,164) (17,050) Inventory valuation................................................ (5,257) (7,073) Other.............................................................. (88) (144) -------------------- -------------------- (103,713) (116,127) -------------------- -------------------- Net operating loss carryforwards................................... 80,195 94,659 Postretirement/postemployment benefits............................. 25,123 24,997 Workers' compensation.............................................. 15,119 16,703 Plant and facility closing costs and severance..................... 10,996 14,232 Incentives and deferred compensation............................... 11,493 11,658 Charitable contributions........................................... 8,425 10,067 Employee benefits.................................................. 9,583 8,251 Other current assets............................................... -- 3,121 Other.............................................................. 442 8,650 -------------------- -------------------- 161,376 192,338 Valuation allowance................................................ (84,350) (84,350) -------------------- -------------------- $ (26,687) $ (8,139) ==================== ====================
Net operating loss carryforwards total approximately $203.2 million through 1997 and expire in 2008 through 2011. Pursuant to the terms of the Keebler acquisition, the predecessor company retained the right to use the net operating losses for potential carrybacks. Any unused operating losses are then available to Keebler, but are significantly restricted under current tax law. Therefore, all net operating loss carryforwards have been fully reserved due to the uncertainty of their realization. Income taxes paid, net of refunds, were approximately $9.9 million, $1.6 million, and $2.3 million for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, and the year ended December 30, 1995, respectively. There were no taxes paid or refunded during the four weeks ended January 26, 1996. 27 25 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SHAREHOLDERS' EQUITY There were no cash dividends declared for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995. The Company's ability to pay cash dividends is limited by the Credit Agreement and the Senior Subordinated Notes. The most restrictive dividend restriction exists under the terms of the Credit Agreement which limits dividends to $25.0 million. On July 29, 1997, the Board of Directors of the Company approved a 1-for-10 reverse stock split of the Company's common stock. In addition, on January 22, 1998, the Board of Directors approved a 57.325-for-1 stock split of the common stock. All per share and related amounts contained in these financial statements and notes have been adjusted to reflect the stock splits as if they had been effective January 26, 1996. As a result of the Sunshine acquisition in 1996, the Company issued GFI 5,675,633 shares of the Company's common stock and a warrant to purchase 6,135,781 shares of the Company's common stock. The shares of $.01 par value stock were valued at $3.23 per share. The warrant is exercisable at $3.23 per share over a seven year period, beginning June 4, 1996 and expiring June 4, 2003. The total value of the stock and warrant held by GFI was $23.6 million at December 28, 1996. Subsequent to the Merger, the stock and warrant held by GFI were transferred to Bermore and reissued for the same value in the name of the Company. At January 3, 1998, the warrant had not been exercised. During the forty-eight weeks ended December 28, 1996, management invested $3.7 million in exchange for 1,963,361 shares of the Company's common stock. The Company repurchased 1,657,036 shares of the common stock to be sold to management from Flowers and Artal for $2.9 million. The additional 306,325 shares of common stock were issued and sold to management for $0.8 million. 15. STOCK OPTION PLAN The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for employee stock options. Under the Company's 1996 Stock Option Plan 9,673,594 shares of the Company's stock were authorized for future grant. There were 7,031,198 options granted in 1996. In 1997, there were an additional 49,873 options granted to management personnel and no forfeitures of the Company's stock options. All options granted have ten year terms and vest at the end of nine years. Vesting can be accelerated on a pro rata basis over the first five years after grant if certain Company performance measures are achieved. The following table summarizes stock option activity:
Forty-Eight Weeks Ended YEAR ENDED JANUARY 3, 1998 December 28, 1996 --------------------------------- -------------------------------- WEIGHTED Weighted AVERAGE Average OPTIONS EXERCISE PRICE Options Exercise Price -------------- ---------------- ------------- ---------------- Outstanding at the beginning of the period... 6,802,471 $ 1.98 -- $ -- Granted...................................... 49,873 5.23 7,031,198 1.98 Exercised.................................... -- -- -- -- Forfeited.................................... -- -- 228,727 1.74 Expired...................................... -- -- -- -- -------------- ------------- Outstanding at the end of the period......... 6,852,344 $ 2.01 6,802,471 $ 1.98 ============== ============= Exercisable at the period end................ 1,587,243 -- -- -- ============== =============
28 26 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. STOCK OPTION PLAN (CONTINUED) Exercise prices as of January 3, 1998 for options outstanding arising from the July 1997 grant (49,873 options), the December 1996 grant (1,114,398 options), and the May 1996 grant (5,688,073 options) were $5.23, $3.23, and $1.74, respectively. The weighted average fair value for options granted in 1997 was $5.23. The weighted average remaining contractual life of the options is approximately eight years. Pro forma information regarding net income is required by the SFAS No. 123, "Accounting for Stock-Based Compensation", and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for the options was estimated at the date of grant using a present value approach with the following weighted-average assumptions: risk-free interest rate of 6.0%; no expected dividend yield; volatility of zero; and a weighted-average expected life of the option of five years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income and basic earnings per share would have been approximately $55.0 million and $0.71 per share for the year ended January 3, 1998 and $14.0 million and $0.19 per share for the forty-eight weeks ended December 28, 1996, respectively. 16. RESTRUCTURING CHARGE In 1993, the predecessor company had recorded an operating charge of $122.7 million to restructure operations. During the first four weeks of 1996, there was no spending against the restructuring reserves. The restructuring reserve balance was $38.2 million at January 26, 1996, and was not a cost assumed as part of the Keebler acquisition. There were no restructuring reserves at January 3, 1998 and December 28, 1996. 17. DISCONTINUED OPERATIONS During July 1995, the predecessor company adopted plans to discontinue the operations of the Frozen Food businesses. On January 9, 1996, UB Investments (Netherlands) B.V. sold the Frozen Food businesses to the Windsor Food Company Ltd. for $70.0 million. A gain on sale of $18.9 million was recorded during the four weeks ended January 26, 1996. Income tax expense was not recognized on the gain on the sale of the Frozen Food businesses as the predecessor company did not provide for any income taxes during the four weeks ended January 26, 1996. Net sales from these operations were $70.9 million for the year ended December 30, 1995. Expenses charged against discontinued operations include expenses associated with the costs of production, marketing, and specific administrative expenses. Expenses do not include an allocation of shared selling, distribution, and general administrative costs. Income from discontinued operations relating to the Frozen Food businesses was $7.3 million for the year ended December 30, 1995. Income tax expense was not recognized for discontinued operations in 1995 due to the Company having a net loss on a consolidated basis. There were no operating activities for the Frozen Food businesses during the four weeks ended January 26, 1996 as the sale was effective as of December 31, 1995. The net assets of the Frozen Food businesses as of December 30, 1995 were $47.7 million. Included in the net assets were primarily inventory, other current assets, property, plant, and equipment, and certain current liabilities and accruals. 29 27 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. AFFILIATE TRANSACTIONS On December 29, 1995, the predecessor company transferred certain assets and the stock of the Frozen Food businesses to U.B. Investments (Netherlands) B.V. for promissory notes that aggregated $70.0 million. On January 9, 1996, U.B. Investments (Netherlands) B.V. sold both these assets and stock to Windsor Food Company Ltd. for $70.0 million, effective December 31, 1995. The aggregate carrying value of these businesses and assets reflected in the December 30, 1995 consolidated balance sheet is $47.7 million, consisting primarily of goodwill of $22.0 million, property, plant, and equipment of $21.2 million, and inventory of $7.6 million, which resulted in a pre-tax realized gain, net of a $3.4 million charge for severance arising from the sale, of $18.9 million for UBIUS. On December 29, 1995, the predecessor company sold the stock of both U.B.F.C., Inc. and U.B.H.C., Inc. to U.B. Investments plc. for $100 each which resulted in no significant gain or loss. Near the end of 1995, and in consideration of completing various pending stock and asset purchase agreements, as described in Note 4, the predecessor company entered into several transactions with affiliated companies within United Biscuits (Holdings) plc. The accompanying consolidated financial statements have not been adjusted to reflect these transactions which are summarized below, as it is the Company's policy to only give effect to dispositions resulting in a gain on the completion of the transaction with the ultimate third party acquirer. On November 30, 1995, Keebler Company sold to UB Group Ltd., ultimately United Biscuits (Holdings) plc., for a $5.0 million affiliate receivable, the entire rights, titles and interests in certain logos, trade names, trademarks, and service marks registered or pending registration by Keebler Company in Australia, New Zealand, Asia, and Europe. The proceeds of this transaction were offset by certain legal fees and registration and licensing costs aggregating $0.5 million. The net gain on the sale of these trademarks is included in other costs and expenses for the year ended December 30, 1995. In 1995, the predecessor company conducted business with various affiliated companies that ultimately were under the control of United Biscuits (Holdings) plc. Transactions with related parties included working capital financing and the purchase of product for resale in the United States. Purchases of product from affiliated companies for resale in the United States were $11.3 million for the year ended December 30, 1995. 19. NET INCOME PER SHARE Earnings per share is calculated using the weighted average number of common and common equivalent shares outstanding during each period. The common equivalent shares relate to the 1996 Stock Option Plan and the warrant issued in connection with the Sunshine acquisition and are calculated using the treasury stock method. 30 28 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. NET INCOME PER SHARE (CONTINUED) The following table sets for the computation of basic and diluted net income per share:
Forty-Eight YEAR ENDED Weeks Ended JANUARY 3, 1998 December 28, 1996 ----------------- ----------------- (IN THOUSANDS) NUMERATOR: Income from operations before extraordinary item..................... $ 62,381 $ 17,677 Extraordinary item, net of tax....................................... 5,396 1,925 ----------------- ----------------- Net income........................................................... $ 56,985 $ 15,752 ================= ================= DENOMINATOR: Denominator for Basic Earnings Per Share Weighted average shares......................................... 77,604 75,244 Effect of Dilutive Securities: Stock options................................................... 2,168 832 Warrants........................................................ 790 -- ----------------- ----------------- Diluted potential common shares................................. 2,958 832 ----------------- ----------------- Denominator for Diluted Earnings Per Share........................... 80,562 76,076 ================= =================
Options to purchase 56,216 shares of common stock at $3.23 per share were outstanding at December 28, 1996, but were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair market value of financial instruments, which includes short and long-term borrowings, was estimated using discounted cash flow analyses based on current interest rates which would be obtained for similar financial instruments. The carrying amounts of these financial instruments approximate fair value. The Company often enters into exchange traded commodity futures and options contracts to protect the Company against a portion of adverse raw material price movements. Gains or losses realized from the liquidation or expiration of the contracts are recognized as part of the cost of raw materials. Gains or losses are deferred in inventory until realized. Cost of sales was increased by losses on futures and options transactions of $3.8 million in 1997, and reduced by gains on futures and options transactions of $0.8 million for the forty-eight weeks ended December 28, 1996, and $3.4 million in 1995. Operations for the four weeks ended January 26, 1996, was unaffected by gains or losses on futures and options as the $0.5 million loss was recorded as an adjustment to the opening balance sheet. As of January 3, 1998, $4.9 million in unrealized futures and options contract losses have been deferred in inventory. The notional amount of open futures and options contracts at January 3, 1998 was $58.1 million and $0.7 million, respectively. The open contracts will expire between March 1998 and November 1998. 31 29 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. UNAUDITED QUARTERLY FINANCIAL DATA Results of operations for each of the four quarters of the fiscal years ended January 3, 1998 and December 28, 1996 follow. Each quarter represents a period of twelve weeks except the first quarter which includes sixteen weeks. In 1996, earnings per share amounts have been restated to comply with SFAS No. 128, "Earnings per Share" (See Note 19).
Quarter 1 Quarter 2 Quarter 3 Quarter 4 ------------------- ------------------- ------------------- ------------------- 1997 1996* 1997 1996 1997 1996 1997** 1996 --------- --------- --------- --------- --------- --------- --------- --------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Net sales............................. $597.0 $335.3 $459.8 $383.8 $485.3 $452.3 $523.1 $474.1 Gross profit.......................... 337.0 177.8 259.7 197.9 277.0 235.0 303.5 260.6 Income before extraordinary item...... 7.6 1.3 13.0 0.5 18.5 0.8 23.3 15.1 Extraordinary item.................... 2.7 -- -- 1.9 -- -- 2.7 -- Net income (loss)..................... 4.9 1.3 13.0 (1.4) 18.5 0.8 20.6 15.1 Basic net income (loss) per share: Income before extraordinary item... $ 0.10 $ 0.02 $ 0.16 $ 0.01 $ 0.24 $ 0.01 $ 0.30 $ 0.20 Extraordinary item................. 0.04 -- -- 0.03 -- -- 0.03 -- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss).................. $ 0.06 $ 0.02 $ 0.16 $(0.02) $ 0.24 $ 0.01 $ 0.27 $ 0.20 ========= ========= ========= ========= ========= ========= ========= ========= Weighted average shares............... 77.6 71.7 77.6 74.4 77.6 77.5 77.6 77.5 ========= ========= ========= ========= ========= ========= ========= ========= Diluted net income (loss) per share: Income before extraordinary item... $ 0.10 $ 0.02 $ 0.16 $ 0.01 $ 0.23 $ 0.01 $ 0.28 $ 0.19 Extraordinary item................. 0.04 -- -- 0.02 -- -- 0.03 -- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss).................. $ 0.06 $ 0.02 $ 0.16 $(0.01) $ 0.23 $ 0.01 $ 0.25 $ 0.19 ========= ========= ========= ========= ========= ========= ========= ========= Weighted average shares............... 79.2 71.7 79.2 75.2 81.3 79.1 81.7 79.1 ========= ========= ========= ========= ========= ========= ========= ========= - ---------- * Quarter 1, 1996 excludes the financial data of the predecessor company for the four weeks ended January 26, 1996. ** Quarter 4, 1997 includes thirteen weeks as fiscal 1997 is a fifty-three week year.
22. SUBSEQUENT EVENTS The consolidated financial statements reflect the Company's declaration of a 57.325-for-1 stock split of common stock ("Stock Split") effective January 22, 1998. The Stock Split was effected in the form of a stock dividend. Accordingly, all references in the consolidated financial statements to number of shares, options, warrants, and the related prices, as well as per share amounts and the average number of shares outstanding, have been restated to reflect these changes. On January 29, 1998, the Company made a public offering of 13,386,661 shares of common stock (the "Offering"). Concurrent with the Offering, Bermore exercised a warrant to purchase 6,135,781 shares of common stock. The exercise of the warrant resulted in the Company receiving $19.8 million of cash proceeds. All of the shares in the Offering were sold by Artal and Bermore, with no proceeds from the Offering going to the Company. As part of the transaction, Flowers acquired additional shares of common stock from Artal and Bermore so that its ownership of outstanding common stock increased from approximately 45% to 55%. Sales of shares and the exercise of the warrant resulted in Artal's ownership decreasing from approximately 45% to 21%, and Bermore's ownership decreasing from approximately 7% to 6% of outstanding common stock. Management's ownership remained at approximately 2%, with the balance of the outstanding common stock being sold to non-affiliates. 32 EX-99.2 12 FINANCIAL SCHEDULES OF KEEBLER FOODS CO. 1 REPORT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY: Our report on the consolidated financial statements of Keebler Foods Company and Subsidiaries and UB Investments US Inc. and Subsidiaries is included in the Form 10-K. In connection with our audits of such financial statements, have also audited the related financial statement schedule listed in the index of the Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 18, 1998 S-1 2 ITEM 14 (D). FINANCIAL STATEMENT SCHEDULE SCHEDULE II KEEBLER FOODS COMPANY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (NOTE 1) FOR THE YEAR ENDED JANUARY 3, 1998, THE FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996, THE FOUR WEEKS ENDED JANUARY 26, 1996, AND THE YEAR ENDED DECEMBER 30, 1995
(IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------ ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS/ OTHER END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------------------------------------------- ---------- ---------- ---------- -------------- ---------- Those valuation and qualifying accounts which are deducted in the balance sheet from the assets to which they apply: YEAR ENDED JANUARY 3, 1998 For discounts and doubtful accounts $ 5,390 $ 18,970 $ - $ (19,395)(1) $ 4,965 ========= ========= ========= ========= ========= For deferred taxes $ 84,350 $ - $ - $ - $ 84,350 ========= ========= ========= ========= ========= For inventory reserves $ 5,508 $ 9,716 $ - $ (8,442)(2) $ 6,782 ========= ========= ========= ========= ========= FORTY-EIGHT WEEKS ENDED DECEMBER 28, 1996 For discounts and doubtful accounts $ 4,181 $ 14,399 $ 907 (3) $ (14,097)(1) $ 5,390 ========= ========= ========= ========= ========= For deferred taxes $ 109,484 $ - $ - $ (25,134)(4) $ 84,350 ========= ========= ========= ========= ========= For inventory reserves $ 9,578 (5) $ 3,370 $ - $ (7,440)(6) $ 5,508 ========= ========= ========= ========= ========= ======================================================================================================================== FOUR WEEKS ENDED JANUARY 26, 1996 For discounts and doubtful accounts $ 3,558 $ 1,577 $ - $ (954)(1) $ 4,181 ========= ========= ========= ========= ========== For deferred taxes $ 116,817 $ (7,333) $ - $ - $ 109,484 ========= ========= ========= ========= ========== For inventory reserves $ 637 $ 378 $ - $ - $ 1,015 ========= ========= ========= ========= ========== YEAR ENDED DECEMBER 30, 1995 For discounts and doubtful accounts $ 1,747 $ 13,801 $ - $ (11,990)(1) $ 3,558 ========= ========= ========= ========= ========== For deferred taxes $ 46,375 $ 70,442 $ - $ - $ 116,817 ========= ========= ========= ========= ========== For inventory reserves $ 1,136 $ - $ - $ (499)(2) $ 637 ========= ========= ========= ========= ========== Note 1: Schedule II - Valuation and Qualifying Accounts includes certain financial data of Keebler Foods Company ("the Company") for the year ended January 3, 1998 and for the forty-eight weeks ended December 28, 1996, as well as certain financial data of UB Investments US, Inc. ("UBIUS"), the predecessor company, for the four weeks ended January 26, 1996, the date on which UBIUS was acquired by INFLO Holdings Corporation ("INFLO"), and the year ended December 30, 1995. The distinction between the Company's and the predecessor company's financial data has been made by inserting a double line. (1) Primarily charges against reserves, net of recoveries. (2) Inventory write-offs. (3) Amount acquired in the acquisition of Sunshine Biscuits, Inc. (4) Adjustment to reduce the valuation allowance as a result of the acquisition of the Company. (5) Includes inventory reserves established in the acquisition of the Company. (6) Adjustment to reduce reserve.
S-2 34 EX-99.3 13 PORTIONS OF THE ANNUAL REPORT 1 EXHIBIT 99.3 PORTIONS OF THE ANNUAL REPORT OF FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 OF KEEBLER FOODS COMPANY. ITEM 1. BUSINESS Keebler Foods Company and its subsidiaries (the "Company" or "Keebler") is the second largest cookie and cracker manufacturer in the United States ("U.S.") with annual net sales of $2.1 billion and a 24.4% share of the U.S. cookie and cracker market as reported by Information Resources, Inc. ("IRI"), based on sales to supermarkets which have annual sales of $2.0 million or more, measured in pounds sold. The Company, primarily through its Keebler Company and Sunshine Biscuits, Inc. ("Sunshine") subsidiaries, produces and distributes a broad line of cookie and cracker products, as well as other consumer food products. RECENT HISTORY The Company was organized under the laws of the State of Delaware as UB Investments US Inc. ("UBIUS" or "predecessor company") on July 14, 1992. The Company was acquired from UB Investments (Netherlands) B.V. on January 26, 1996 (the "Keebler acquisition") by INFLO Holdings Corporation ("INFLO"), a corporation which was jointly owned by Artal Luxembourg S.A. ("Artal"), a private investment company, and Flowers Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company and one of the country's largest manufacturers and marketers of fresh and frozen baked foods. Immediately after the Keebler acquisition, the Company was renamed Keebler Corporation. In conjunction with the Keebler acquisition, INFLO sold 2.5% of the outstanding shares of $0.01 par value common stock to certain members of management. On June 4, 1996, the Company acquired Sunshine (the "Sunshine acquisition") from G.F. Industries, Inc. ("GFI"). As part of consideration paid in the sale of Sunshine, GFI was issued common stock and a warrant to purchase 6,135,781 shares of common stock. On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger") and subsequently changed its name to Keebler Foods Company. After the Merger, the stock and warrant held by GFI were transferred to Bermore, Limited ("Bermore"), a privately held corporation and the parent of GFI, and reissued for the same value in the name of the Company. On February 3, 1998, the Company completed an initial public offering (the "Offering") of 13,386,661 shares of common stock. Concurrent with the Offering, Bermore exercised the warrant in exchange for 6,135,781 shares of common stock. The exercise of the warrant resulted in the Company receiving $19.8 million of cash proceeds. All of the shares in the Offering were sold by Artal and Bermore, with no proceeds from the Offering going to the Company. As part of the transaction, Flowers acquired additional shares of common stock from Artal and Bermore which increased its ownership from approximately 45% to 55%. Artal, having sold shares to both Flowers and the public, retained ownership of approximately 21%. Bermore exercised the warrant, sold shares to both Flowers and the public, and retained ownership of approximately 6%. GENERAL BUSINESS DESCRIPTION The Company competes in the U.S. retail cookie and cracker market which in 1997 generated sales of approximately $8.3 billion measured in retail sales to consumers. The U.S. cookie and cracker market, which is relatively stable, has experienced slow but steady growth over the past twenty years. Supermarkets accounted for 77.1% of 1997 retail sales in the cookie and cracker industry, with mass merchandisers, convenience stores, and drug stores accounting for the balance. Since 1992, U.S. annual dollar supermarket sales of cookies and crackers have increased by an average of 1.6% per year. The Company believes the non-supermarket channels of distribution are becoming increasingly more important. The Company produces a number of well recognized brands under the Keebler and Sunshine labels. Major brands include: CHEEZ-IT, CHIPS DELUXE, CLUB, FUDGE SHOPPE, HYDROX, SUNSHINE KRISPY, MUNCH'EMS, SANDIES, TOWN HOUSE, VIENNA FINGERS, WHEATABLES, and ZESTA. The Company also imports and distributes CARR'S crackers in the U.S. under an exclusive long-term licensing and distribution agreement with United Biscuits. CARR'S crackers are the best-selling specialty cracker in the U.S. 1 2 In addition to retail branded products, the Company also produces private label cookies and crackers, which are sold by retailers under their own brands. Keebler is also the number one manufacturer of cookies and crackers for the foodservice market, as reported by the International Foodservice Manufacturers Association ("IFMATRAC"). The Company is the top manufacturer of retail branded ice cream cones in the U.S., as well as the leader of preformed retail branded pie crusts which are sold under the KEEBLER READY CRUST brand name. Keebler also produces custom-baked products for other marketers of branded food products. Following the Keebler acquisition in January 1996, the Company's new management began implementing a business strategy designed to capitalize on the Company's competitive strengths, which include strong national brands and a national direct store door sales and distribution system ("DSD system"). The key elements of the Company's strategy include (i) building brand strength in new and existing product lines, (ii) increasing sales in non-supermarket channels, (iii) increasing the efficiency of operations, and (iv) pursuing acquisitions that complement or provide further opportunities to use existing brands, product lines, or distribution systems. The Company completed the planned integration of Sunshine's operations into those of Keebler by the end of 1996. The combination of Keebler and Sunshine allowed the Company to achieve efficiencies in administration, purchasing, production, marketing, sales, and distribution. In particular, the sales and distribution of Sunshine retail branded products were incorporated into Keebler's DSD distribution system which had excess capacity. Filling excess capacity with Sunshine products made Keebler's DSD distribution system more efficient and allowed the Company to focus sales and marketing efforts on more profitable retail branded products. The Company has focused on new product introductions and line extensions within its core segments, such as KEEBLER CHOCOLATE CHEWY CHIPS DELUXE cookies and Nacho CHEEZ-IT crackers, as well as introductions into new or less competitive segments, such as KEEBLER COOKIE STIX cookies and KEEBLER SNACKIN' GRAHAMS crackers. The Company has also developed new sizes of its leading products to enable it to expand into non-supermarket channels. The Company recognizes that the mass distribution of consumer food products is an important element in maintaining sales growth and providing service to customers. The Company attempts to meet the changing demands of customers by planning appropriate stock levels and reasonable delivery times consistent with achieving optimal economics of distribution. In order to achieve these objectives, Keebler has developed a network of manufacturing plants, shipping centers, and distribution warehouses strategically located throughout the continental U.S. to provide high national in-store presence. The Company uses a combination of Keebler-owned, public, and contract carriers to deliver products from its distribution points to customers. The Company distributes retail branded cookie and cracker products through its DSD distribution system, which services substantially all supermarkets in the U.S., as measured by IRI. The Company believes its DSD distribution system provides certain competitive advantages. Members of Keebler's sales force, rather than store employees, stock and arrange the Company's products on store shelves and build end-aisle and free-standing product displays. Frequent store presence of Keebler's sales force employees provides the Company with a high level of control over the availability and presentation of its products. The Company believes this control allows it to maintain shelf space, more effectively introduce new products, and permits better execution of in-store promotions. In addition, store presence allows the Company to monitor competitors' in-store product promotions. Keebler believes in-store promotions are important because purchases of cookies and crackers are often impulse driven. In addition to Keebler's DSD system, the Company uses a network of independent distributors and brokers to serve convenience stores and vending distributors. In the case of club stores and foodservice distribution, Keebler uses a dedicated sales force and ships its products directly to the customers' warehouses. The Company uses a warehouse sales and distribution system to sell and distribute KEEBLER READY CRUST pie crusts and private label cookies and crackers to its customers, including retail outlets otherwise served by Keebler's DSD distribution system. CARR'S crackers are sold through a network of independent specialty distributors. 2 3 COMPETITION The U.S. branded cookie and cracker industry is led by Keebler and Nabisco, Inc. ("Nabisco"), which together account for 58.5% of sales volume, as reported by IRI. Smaller competitors include numerous national, regional, and local manufacturers of both branded and private label products. Competition in Keebler's target markets takes many forms including (i) establishing favorable brand recognition, (ii) developing products sought by consumers, (iii) implementing appropriate pricing, (iv) providing strong marketing support, and (v) obtaining access to retail outlets and sufficient shelf space. Nabisco is the largest manufacturer in the U.S. cookie and cracker industry. Keebler has a 24.4% share of the retail cookie and cracker market, while Nabisco has a 34.1% share, as measured by IRI. The remaining industry participants primarily target certain segments of the industry or focus on certain geographical regions of the U.S. Keebler and Nabisco are also the only cookie and cracker producers that have national wholly-owned DSD distribution systems, although Pepperidge Farms operates a national DSD distribution system through independent distributors. SEASONALITY The Company's net sales, net income, and cash flows are affected by the timing of new product introductions, promotional activities, price increases, and a seasonal sales bias toward the second half of the year due to events such as back-to-school, Thanksgiving, and Christmas. The relative mix between cookie and cracker sales varies throughout the year with stronger cracker sales in the last quarter of the calendar year. CUSTOMERS The Company's top ten customers in 1997 accounted for 27.7% of Keebler's net sales. No single customer accounted for more than 4.6% of net sales. RAW MATERIALS The principal raw materials used in the Company's food products consist of flour, sugar, chocolate, shortening, and milk. Keebler also uses paper products, such as corrugated cardboard, as well as films and plastics to package its products. Raw materials and packaging supplies are readily available from various suppliers. There is no significant reliance on any one supplier. The Company uses hedging techniques to minimize the impact of price fluctuations in raw materials but not for speculative or trading purposes. The hedging techniques, however, may not result in a reduction in the Company's raw material costs or protect the Company from sharp increases in certain raw material costs, which the Company has experienced in the past. INTELLECTUAL PROPERTY The Company owns a number of patents, licenses, trademarks, and trade names. Principal trademarks and trade names include KEEBLER, Ernie the Keebler Elf, the Hollow Tree logo, CHEEZ-IT, CHIPS DELUXE, CLUB, FUDGE SHOPPE, HI-HO, HYDROX, SUNSHINE KRISPY, MUNCH'EMS, READY CRUST, SANDIES, SOFT BATCH, SUNSHINE, TOASTEDS, TOWN HOUSE, VIENNA FINGERS, WHEATABLES, and ZESTA. The Company is the exclusive licensee of the CARR'S brand name in the U.S. Such trademarks and trade names are considered to be of material importance to the business of the Company since they have the effect of developing brand identification and maintaining consumer loyalty. Management is not aware of any fact that would negatively impact the continuing use of any patents, licenses, trademarks, or trade names. 3 4 RESEARCH AND DEVELOPMENT The Company engages in research activities, which principally involve development of new products, improvement of the quality of existing products, and improvement and modernization of production processes. The Company also carries out development and evaluation of new processing techniques for both current and proposed product lines. Identifiable research and development costs are set forth on page F-12 of the Company's consolidated financial statements. REGULATION As a manufacturer and marketer of food items, the Company's operations are subject to regulation by various federal government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission (the "FTC"), the Environmental Protection Agency, and the Department of Commerce, as well as various state agencies, with respect to production processes, product quality, packaging, labeling, storage, and distribution. Under various statutes and regulations, such agencies prescribe requirements and establish standards for quality, purity, and labeling. The finding of a failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines or compulsory withdrawal of products from store shelves. In addition, the Company is subject to certain health and safety regulations issued under the Occupational Safety and Health Act, as well as regulation by the FTC of advertising performed by the Company. ENVIRONMENTAL The Company's operations and properties are subject to federal, state, and local laws and regulations relating to the storage, handling, emission, and discharge of materials and wastes into the environment. The primary environmental laws affecting Keebler's operations are the Federal Clean Air Act and Clean Water Act. The Company may be required to spend significant sums in order to maintain compliance with environmental laws, particularly with respect to emission control equipment, replacement of chlorofluorocarbons (i.e. ozone-depleting substances) in cooling equipment, and asbestos abatement projects. Although it is difficult to estimate the cost of complying with environmental laws, the Company does not believe that compliance with, or liability under, any environmental laws individually or in the aggregate will have a material adverse effect on its results of operations or financial condition. EMPLOYEES The Company employs approximately 9,500 persons, of which approximately 5,200 are represented by unions. Keebler believes its relations with its employees to be good. ITEM 2. PROPERTIES The Company operates eleven manufacturing facilities in the U.S. of which ten are owned and one is leased. The manufacturing facilities are located in Athens, Georgia; Chicago, Illinois; Cincinnati, Ohio; Columbus, Georgia; Denver, Colorado; Des Plaines, Illinois; Florence, Kentucky; Grand Rapids, Michigan; Kansas City, Kansas; Macon, Georgia; and Sayreville, New Jersey. Keebler also owns and operates a dairy in Fremont, Ohio that produces cheese under a proprietary formula that is used as an ingredient in CHEEZ-IT crackers. In addition, the Company owns one idle manufacturing facility located in Atlanta, Georgia that is held for sale. As a result of capital expenditures made over the past decade, management believes the manufacturing facilities are modern and efficient. Management also believes manufacturing capacity is sufficient to meet foreseeable needs. 4 5 Distribution facilities consist of eleven shipping centers attached to the manufacturing facilities, ten stand-alone shipping centers (two owned and eight leased; of which one is idle), and sixty-six distribution centers (eleven owned and fifty-five leased) throughout the U.S. Of the sixty-six distribution centers, seven were subleased and seven were idle. These seven idle facilities have been accrued for in the plant and facility closing costs. In addition, one of the owned, but idle, distribution facilities is held for sale. The Company also leases thirty-two warehouses and eighteen depots that are located throughout the U.S. and are utilized by the sales force in the distribution of the Company's products. Management believes there is sufficient distribution capacity to meet foreseeable needs. In addition to manufacturing and distribution facilities, the Company owns two office buildings and leases two others as part of its corporate office facility. The Company also leases numerous sales offices throughout the country. ITEM 6. SELECTED FINANCIAL DATA The selected historical financial data presented below as of and for the year ended January 3, 1998, the forty-eight weeks ended December 28, 1996, the four weeks ended January 26, 1996, and the year ended December 30, 1995 have been derived from, and should be read in conjunction with the historical consolidated financial statements of the Company and UBIUS, the predecessor company, including the respective notes thereto, included elsewhere. The selected historical financial data presented below as of and for the fiscal years ended December 31, 1994 and January 1, 1994 have been derived from the consolidated financial statements of the predecessor company that are not included herein. The distinction between the Company's and the predecessor company's selected financial data, as shown below, has been made by inserting a double line. The results of operations presented below are not necessarily indicative of results to be expected for any future period. The information set forth below should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and respective notes thereto, included elsewhere herein.
Keebler Foods Company || UBIUS ------------------------|| ----------------------------------------------- Forty-Eight || Four Year Ended Year Ended Weeks Ended || Weeks Ended ----------------------------------- January 3, December 28,|| January 26, December 30,December 31, January 1, 1998 1996 (a) || 1996 1995 1994 1994 ----------- ------------|| ----------- ----------- ----------- ----------- (In Millions Except || (In Millions) Per Share Data) || || OPERATING DATA: || Net sales ....................................... $2,065.2 $1,645.5 || $101.7 $1,578.6 $1,599.7 $1,650.1 Gross profit .................................... 1,177.2 871.3 || 46.8 831.8 894.2 931.5 Restructuring charges ........................... - - || - - - 120.1 Loss on impairment of Salty Snacks business ..... - - || - 86.5 - - Income (loss) from continuing operations ........ 141.4 70.1 || (25.5) (137.9) 46.4 (67.6) Income tax expense (benefit) .................... 45.2 14.0 || - (0.5) (1.1) (22.3) Discontinued operations: || Income from operations of discontinued Frozen || Food businesses, net of tax ................ - - || - 7.4 3.4 0.6 Gain on disposal of Frozen Food businesses, || net of tax ................................. - - || 18.9 - - - Extraordinary item: || Loss on early extinguishment of debt, || net of tax ................................. 5.4 1.9 || - - - - Net income (loss) ............................... $ 57.0 $ 15.8 || $ (6.5) $ (158.3) $ (23.0) $ (147.2) || Basic Net Income per Share: || Income from continuing operations || before extraordinary item .................. $ 0.80 $ 0.24 || Extraordinary item .......................... 0.07 0.03 || -------- -------- || Net income .................................. $ 0.73 $ 0.21 || ======== ======== || Weighted Average Shares Outstanding ............. 77.6 75.2 || ======== ======== ||
5 6
Keebler Foods Company || UBIUS ------------------------|| ----------------------------------------------- Forty-Eight || Four Year Ended Year Ended Weeks Ended || Weeks Ended ----------------------------------- January 3, December 28,|| January 26, December 30,December 31, January 1, 1998 1996 (a) || 1996 1995 1994 1994 ----------- ------------|| ----------- ----------- ----------- ----------- (In Millions Except || (In Millions) Per Share Data) || || OTHER DATA: || EBITDA, as adjusted (b) ......................... $ 202.1 $ 119.6 || $ (23.5) $ (93.3) $ 89.5 $ 98.4 Depreciation and amortization (excluding items || related to discontinued operations) ......... 60.7 49.5 || 2.0 44.6 43.1 45.9 Capital expenditures (excluding expenditures || related to discontinued operations) ......... 48.4 29.4 || 3.2 54.2 54.6 30.6 || CASH FLOW DATA: || Cash Provided from (Used by) || Operating activities ........................ $ 218.3 $ 53.2 || $ (0.4) $ (61.4) $ (17.4) $ 22.0 Investing activities ........................ (41.5) (130.1) || 65.2 (52.6) (45.9) (92.1) Financing activities ........................ (161.6) 86.8 || (65.7) 104.4 69.4 58.3 --------- --------- || --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents $ 15.2 $ 9.9 || $ (0.9) $ (9.6) $ 6.1 $ (11.8) ========= ========= || ========= ========= ========= =========
- --------------------------------------------- (a) Includes the operating results of Sunshine from acquisition date of June 4, 1996 through December 28, 1996. Other matters affecting comparability are detailed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (b) EBITDA, as adjusted, is defined as income (loss) from continuing operations before interest, taxes, depreciation, amortization, and restructuring charges (gains).
As of || As of ------------------------|| -------------------------------------------------- January 3, December 28,|| January 26, December 30, December 31, January 1, 1998 1996 || 1996 1995 1994 1994 ----------- ------------|| ----------- ----------- ----------- ----------- (In Millions) || (In Millions) || BALANCE SHEET DATA: || Cash and cash equivalents ....................... $ 27.2 $ 12.0 || $ 2.1 $ 3.0 $ 12.5 $ 6.4 Total assets .................................... 1,042.9 1,102.1 || 849.1 926.9 1,001.2 1,043.0 Due to affiliate ................................ -- -- || 105.0 108.0 551.6 872.7 Total debt (including capital leases) ........... 298.8 457.9 || 371.4 437.6 333.2 263.8 Shareholders' equity (deficit) .................. 222.0 165.1 || 45.3 51.8 (234.9) (511.9)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SET FORTH BELOW IS A DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995. THE YEAR ENDED DECEMBER 28, 1996 INCLUDES BOTH THE FORTY-EIGHT WEEKS OF KEEBLER FOODS COMPANY UNDER CURRENT MANAGEMENT AND THE FOUR WEEKS OF UBIUS UNDER FORMER MANAGEMENT. THE 1995 FINANCIAL RESULTS INCLUDE FINANCIAL INFORMATION RELATING TO THE SALTY SNACKS BUSINESS AND PRESENTS THE FROZEN FOODS BUSINESSES AS A DISCONTINUED OPERATION (BOTH DEFINED ON PAGE F-11 OF THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS), BOTH OF WHICH WERE SOLD OR LIQUIDATED BY UBIUS PRIOR TO THE ACQUISITION OF UBIUS BY INFLO. THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY AND THE RELATED NOTES THERETO APPEARING ELSEWHERE. 6 7 RESULTS OF OPERATIONS MATTERS AFFECTING COMPARABILITY The Company's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The 1997 fiscal year consists of fifty-three weeks. As a result of the Keebler acquisition, which closed on the last day of the first four week period of 1996, the fiscal year for 1996 consisted of the forty-eight weeks ended December 28, 1996. The 1995 fiscal year of the predecessor company was comprised of fifty-two weeks. The Company's operating results for the forty-eight weeks ended December 28, 1996 have been combined with the operating results of the predecessor company for the four weeks ended January 26, 1996 to compare the year ended December 28, 1996 to the years ended January 3, 1998 and December 30, 1995. The Company's operating results for the year ended December 28, 1996 include the operating results of Sunshine from the acquisition date of June 4, 1996, whereas the year ended January 3, 1998 includes the operating results of Sunshine for the entire year. Additionally, the Company's operating results have been restated to reflect the Merger as if it had been effective January 26, 1996. For the year ended December 30, 1995, the financial results of the predecessor company include the operating results of the Salty Snacks business. The Salty Snacks business was liquidated by prior management in connection with the Keebler acquisition. The 1995 results of operations include net sales of $135.7 million and a loss from operations of $25.6 million related to the Salty Snacks business. The 1995 operating results for the Salty Snacks business excluded an allocation of the fixed portion of selling, distribution, and general administrative expenses. In addition, the December 30, 1995 financial results of the predecessor company also include the results of operations of the Frozen Food businesses presented as a discontinued operation. The Company's results of operations, expressed as a percentage of net sales, for the last three years ended January 3, 1998, December 28, 1996, and December 30, 1995 are set forth below:
Years Ended ------------------------------------------------ January 3, December 28, December 30, 1998 1996 1995 -------------- -------------- -------------- NET SALES ....................................................... 100.0% 100.0% 100.0% COSTS AND EXPENSES: Cost of sales................................................. 43.0 47.5 47.3 Selling, marketing, and administrative expenses............... 49.7 49.6 56.0 Loss on impairment of Salty Snacks business .................. -- -- 5.5 Other......................................................... 0.5 0.4 (0.1) ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS........................ 6.8 2.5 (8.7) INTEREST EXPENSE, NET........................................... 1.6 2.2 1.8 ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE...................................................... 5.2 0.3 (10.5) Income tax expense............................................ 2.2 0.8 -- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ........................................................ 3.0 (0.5) (10.5) DISCONTINUED OPERATIONS: Income from operations of discontinued Frozen Food businesses, net of tax.................................................. -- -- 0.5 Gain on disposal of discontinued Frozen Food businesses, net of tax ................................................. -- 1.1 -- ----------- ----------- ----------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........................ 3.0 0.6 (10.0) EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of tax.............. 0.3 0.1 -- ----------- ----------- ----------- NET INCOME (LOSS)............................................... 2.7% 0.5% (10.0)% =========== =========== ===========
7 8 COMPARISON OF FISCAL 1997 TO 1996 NET SALES. Net sales of $2,065.2 million in 1997 were $318.0 million, or 18.2%, higher than net sales of $1,747.2 million in 1996. The growth in net sales for 1997 was achieved through incremental sales from both the Sunshine acquisition and increased volumes. Sunshine results for 1996 were only included from the acquisition date of June 4, 1996. In 1996, net sales of Sunshine for the twenty-two weeks ended June 4, 1996 were $229.8 million. Sunshine net sales, in a full year-on-year comparison, were 27.3% and 29.6% of total Company net sales in 1997 and 1996, respectively. In addition to the incremental revenue associated with the Sunshine acquisition, increased volumes in 1997 provided 4.5% growth in net sales over the prior year. The volume growth was achieved through emphasis on more profitable cookie and cracker products, while discontinuing or repositioning less strategic products, and the introduction of new products and line extensions. GROSS PROFIT. Gross profit in 1997 of $1,177.2 million was $259.0 million higher than the prior year and 4.5 percentage points better as a percent of net sales. The increase in gross profit in 1997 was due to higher sales, lower commodity and package material prices, and the implementation of cost reduction and productivity programs. Of the total improvement, approximately 64.5% was attributed to incremental sales associated with both the Sunshine acquisition and increased volume. The balance of the improvement was achieved through a more profitable sales mix and cost savings and productivity improvements achieved mainly through further automation of the manufacturing facilities and higher capacity utilization attributed to streamlining the manufacturing facilities. The shift toward higher margin brands benefited gross profit by $11.8 million compared to the prior year. Also contributing to the increase in gross profit in 1997 were lower prices paid for raw materials, particularly for flour and soybean oil, and lower prices paid for package materials, primarily for cartons, corrugated cardboard, and flexible film. SELLING, MARKETING, AND ADMINISTRATIVE EXPENSES. Selling, marketing, and administrative expenses for 1997 of $1,026.2 million, or 49.7% of net sales, increased $160.0 million from 1996, but remained relatively stable as a percent of net sales. Spending rose in 1997 due to both the impact of higher sales and increased marketing expense. The impact of higher sales contributed $126.9 million to the increase in selling, marketing, and administrative expenses. Marketing expense represented 23.8% of net sales in 1997 compared to 22.2% in 1996. The higher spending rate in 1997 was due to increased brand-building national advertising and consumer promotions which were up $29.2 million over the prior year. The increased spending as a result of these factors, along with inflation, was offset by the impact of higher volumes in a more efficient, relatively fixed cost, selling and distribution network. Therefore, selling, marketing, and administrative expenses as a percent of net sales remained comparable to the prior year. OTHER. Other expense for 1997 was $2.3 million, or 32.0%, higher than 1996 due to higher bank fees and amortization of intangibles. Bank fees in 1997 were higher than the prior year due to several amendments to the Company's financing agreement. Other expense for 1997 included a full year of amortization of trademarks and goodwill recorded as part of the Sunshine acquisition compared to only twenty-eight weeks in 1996. INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations of $141.4 million was $96.7 million higher than 1996. The improvement was attributed to a 18.2% increase in net sales driven by volume growth compounded by enhanced gross margins resulting from a more profitable mix, cost reductions, and improved productivity. Total benefits realized more than offset incremental marketing and amortization expense. INTEREST EXPENSE. Interest expense of $33.8 million for 1997 was $4.5 million lower than in 1996, primarily due to a lower average debt balance in 1997. The decrease in the average debt balance was the result of principal pre-payments of $113.8 million on the term loans and a $29.0 million pre-payment of the Seller Note. In addition, the weighted average interest rate for 1997 was 0.28 percentage points lower than the 1996 weighted average rate. INCOME TAXES. Income taxes for the year were provided at an effective tax rate of 42%. The effective tax rate exceeded the statutory rate due to nondeductible expenses, principally amortization of intangibles, including trademarks, trade names, and goodwill. In 1996, the effective tax rate for the forty-eight weeks ended December 28, 1996 was 44.2% and was higher than the 1997 rate due to a preliminary estimate of nondeductible expenses. Income tax expense was not provided for during the first four weeks of 1996. As part of the Keebler acquisition, the 8 9 Company adjusted the valuation allowance on deferred taxes by $25.1 million to reflect the elimination of certain deferred tax assets revalued in the purchase price allocation. The Company carried a deferred tax valuation allowance of $84.4 million at January 3, 1998 and December 28, 1996 to provide for the uncertainty in realizing the deductibility of deferred tax assets recognized. Pursuant to the terms of the Keebler acquisition, the predecessor company retained the right to use the net operating losses for potential carrybacks. Any unused operating losses are then available to Keebler, but are significantly restricted under current tax law. Therefore, all net operating loss carryforwards have been fully reserved due to the uncertainty of their realization. DISCONTINUED OPERATIONS. In 1995, the predecessor company adopted plans to discontinue the operations of the Frozen Food businesses, and in the first four weeks of 1996, a gain of $18.9 million, net of income taxes, was recognized on the disposal of the Frozen Food businesses. EXTRAORDINARY ITEM NET OF INCOME TAXES. In 1997 and 1996, Keebler recorded extraordinary charges net of tax of $5.4 million and $1.9 million, respectively. In 1997, $3.8 million of the extraordinary charges, net of tax, related to the write-off of debt issuance costs associated with the early retirement of the term loans. An additional $1.6 million net of tax extraordinary charge was recorded due to a loss on the early extinguishment of the Seller Note entered into at the time of the Keebler acquisition. In 1996, the $1.9 million extraordinary charge, net of tax, related to the write-off of debt issuance costs associated with the $125.0 million early extinguishment of increasing rate notes. NET INCOME (LOSS). Net income of $57.0 million in 1997 was $47.7 million higher than net income of $9.3 million for 1996. The substantial growth in net income was the result of increased volume, the inclusion of the Sunshine business for the entire year, improved gross margins, and savings achieved by leveraging the fixed cost structure of the sales and distribution network. COMPARISON OF FISCAL 1996 TO 1995 NET SALES. Net sales in 1996 increased $168.6 million, or 10.7%, over 1995. The 1996 net sales included Sunshine revenues of $291.2 million, while net sales in 1995 included sales of the Salty Snacks business of $135.7 million. After adjusting for these changes in the Company's business, the year-on-year sales increase was up $13.1 million. Along with achieving this growth, the Company also shifted its sales focus to more profitable products. The new focus was accomplished through selected price increases on Keebler branded cookie and cracker products, a more targeted marketing emphasis, new products, and the discontinuation of weaker products. While volumes in 1996 were relatively flat compared to volumes in 1995, higher revenues were achieved through these changes in product mix and selected price increases. Temporary volume decreases in sales to convenience stores, associated with a change in the selling organization and product discontinuations, were offset by volume gains from new products and broadened distribution. GROSS PROFIT. Gross profit as a percentage of net sales for 1996 was 52.6% compared to 52.7% in 1995. While gross margins were down slightly year-on-year, this belies the significant improvements that were achieved. The change in sales mix noted above, resulted in an emphasis on more profitable volume. However, the value-added products emphasized as part of the 1996 sales strategy carried higher production costs than the products sold in 1995. The impact on gross profit of this change in sales mix along with higher flour prices contributed to higher cost of sales in 1996 versus 1995. Gross profit margins in 1996 also reflect the inclusion of Sunshine products, which historically carried a lower gross margin than Keebler products. The impact of higher costs was more than fully offset by increasing capacity utilization, cost reductions at the bakeries, as well as lowering scrap levels and achieving a more balanced production. In addition, reductions in bakery overhead staffing and a more efficient balancing of internal and co-packing arrangements achieved a lower cost of production. SELLING, MARKETING, AND ADMINISTRATIVE EXPENSES. Selling, marketing, and administrative expenses decreased $18.3 million and improved by 6.4 percentage points as a percent of net sales in 1996 compared to 1995. Included in 1996 expenses were selling, marketing, and administrative expenses of $131.9 million directly attributable to the Sunshine business; while 1995 included expenses of $87.4 million directly associated with the Salty Snacks business (excluding allocation of the fixed portions of selling, distribution, and administrative expenses). Excluding these influences, selling, marketing, and administrative expenses decreased in 1996 compared to 1995 by $62.8 9 10 million. The improvement was principally accomplished through a targeted marketing plan behind Keebler products and Keebler's cost reduction program to rationalize the selling and administrative cost structure. In 1996, the Company's focus on spending for trade promotions at the store level resulted in higher trade allowances which were more than offset by the $49.5 million decrease in national advertising and consumer promotions. The cost reductions in the selling and administrative structures were achieved primarily through headcount reductions of approximately 1,740 and changing from a relatively higher cost step-van selling organization to independent distributors to serve the convenience store channel. A decrease in research and development costs of $9.6 million was primarily attributed to headcount reductions, more focused new product programs in 1996, and lower project activity due in part to the liquidation of the Salty Snacks business prior to the Keebler acquisition. The cost reductions more than offset increased administrative expenses of management incentives and increased depreciation as a result of the Keebler and Sunshine acquisitions. OTHER. Other income and expense for 1996 was $7.2 million compared to $1.4 million of income for 1995. Other expense in 1996 consisted of $5.2 million of amortization resulting from both the Keebler and Sunshine acquisitions and bank service charges. In 1995, other income and expense consisted of $1.7 million of amortization expense, $1.4 million of miscellaneous expenses and bank service charges, and other income of $4.5 million representing the gain on the sale of interests in certain logos, trade names, trademarks, and service marks registered or pending registration in Australia, New Zealand, Asia, and Europe. INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations was $44.7 million in 1996, an improvement of $182.5 million over the loss from continuing operations for 1995. After adjusting the 1995 net operating loss of $137.9 million for the $25.6 million loss in the Salty Snacks business and the impairment write down of $86.5 million associated with that business, the earnings improvement in 1996 over 1995 was $70.5 million. The turnaround resulted from improved gross margins on Keebler brands, more efficient marketing expenditures, and cost savings achieved in sales and distribution and corporate overhead. The cumulative savings from these initiatives more than offset incremental depreciation and amortization expense totaling $9.7 million recorded as a result of the Keebler and Sunshine acquisitions. INTEREST EXPENSE. For 1996, net interest expense was $38.4 million compared to $28.3 million in 1995. The increase was due to the amortization of debt issuance costs and higher overall borrowings carrying a higher average interest rate as compared to the prior year. INCOME TAXES. The Company provided for income taxes at an effective tax rate of 44.2% for the forty-eight weeks ended December 28, 1996. The predecessor company did not provide for any income tax expense for the four weeks ended January 26, 1996. The effective tax rate was higher than the statutory rate because of nondeductible expenses (principally, amortization of intangibles, including trademarks, trade names, and goodwill). In 1995, there was no current provision for income taxes due to operating losses incurred and the inability to carryback the losses to recover taxes paid in prior years. As part of the Keebler acquisition, the Company adjusted the valuation allowance on deferred taxes by $25.1 million to reflect the elimination of certain deferred tax assets revalued in the purchase price allocation. The deferred tax valuation allowance of $84.4 million at December 28, 1996 provided for the uncertainty in realizing the deductibility of deferred tax assets recognized. The predecessor company, pursuant to the terms of the Keebler acquisition, retained the right to use the net operating losses for potential carrybacks. Any unused operating losses are then available to Keebler, but are significantly restricted under current tax law. Therefore, all net operating loss carryforwards have been fully reserved due to the uncertainty of their realization. DISCONTINUED OPERATIONS. During 1995, the predecessor company decided to dispose of the Frozen Food businesses and, therefore, presented the operations of those businesses as a discontinued item in the statement of operations. In the first four weeks of 1996, a gain of $18.9 million net of income taxes on the disposal of the Frozen Food businesses was recognized. EXTRAORDINARY ITEM NET OF INCOME TAXES. A before-tax extraordinary loss of $3.2 million on the early extinguishment of debt was recorded in the second quarter of 1996. The loss consisted primarily of the write-off of unamortized bank fees incurred when the Company replaced the Keebler acquisition bridge loan with the Notes. The tax benefit on the extraordinary loss was $1.3 million resulting in an after-tax loss of $1.9 million. 10 11 NET INCOME (LOSS). Net income of $9.3 million for 1996 represented a substantial improvement over the $158.3 million net loss for the prior year. The improvement was attributable to operating improvements, the divestiture of the unprofitable Salty Snacks business, and the recognized gain of $18.9 million on the disposition of the Frozen Food businesses. LIQUIDITY AND CAPITAL RESOURCES A condensed cash flow statement of the Company follows:
Years Ended ------------------------------------------------ January 3, December 28, December 30, 1998 1996 1995 -------------- -------------- -------------- (IN MILLIONS) CASH PROVIDED FROM (USED BY) Operating activities........................... $ 218.3 $ 52.8 $ (61.4) Investing activities........................... (41.5) (64.9) (52.6) Financing activities........................... (161.6) 21.1 104.4 --------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. $ 15.2 $ 9.0 $ (9.6) ========== ======== ========
CASH FLOW FOR 1997 During 1997, cash provided from operating activities was $218.3 million. The primary contributors to the positive cash flow for the year were net earnings of $57.0 million, a lower investment in trade accounts receivable, and reduced funding of current liabilities and income taxes. Improved accounts receivable collection procedures provided $38.2 million of working capital. The reduced funding of current liabilities was attributable primarily to the timing of payments, while the increase in income taxes payable was attributable to a $47.7 million increase in earnings over the prior year. Partially offsetting these benefits was spending on plant and facility closing costs and severance and the payment of an arbitration award. Spending on plant and facility closing costs and severance relating to exit costs associated with the Keebler and Sunshine acquisitions, although down from the prior year, accounted for $13.7 million of cash used by operations for the year ended January 3, 1998. Spending on plant and facility closing costs and severance is expected to conclude by the end of 1998, with the exception of noncancellable lease obligations which are expected to continue until 2004. In addition, the Company paid an arbitration award regarding a contract production arrangement, which was entered into by the predecessor company, in the amount of $6.8 million plus legal fees. Cash used by investing activities of $41.5 million for 1997 was primarily used to fund capital expenditures. Capital spending of $48.4 million was made principally to enhance, update or realign the existing production lines, provide distribution and production efficiencies, and to achieve near-term cost savings. Proceeds received from asset disposals of $7.0 million partially offset capital expenditures. The sale of the Santa Fe Springs plant accounted for $3.6 million of the year-to-date proceeds, with the remainder of the proceeds provided mainly from the sale of trucks and machinery and equipment. The Company continues to carry the Atlanta, Georgia manufacturing facility as an asset held for sale and expects the disposition to occur before the end of 1998 without a significant gain or loss. Cash used by financing activities in 1997 was $161.6 million. In 1997, the Company entered into an amendment and restatement of the Credit Agreement, proceeds from which were used to extinguish existing term loans under the Credit Agreement of $153.6 million. The extinguishment was funded primarily by a draw down on the revolving loan facility and $109.8 million under a new term loan, in each case under the Credit Agreement. During 1997, the draw down on the revolving loan facility was completely repaid. Additionally, in the fourth quarter of 1997, the Company extinguished $29.0 million of debt related to the Seller Note and made $70.0 million in principal pre-payments on the term loan under the Credit Agreement using existing cash resources. Scheduled principal payments of $18.7 million were made during the year on the term loan and other debt. 11 12 CASH FLOW FOR 1996 AND 1995 Cash provided from operating activities increased $114.2 million in 1996 over the cash used in operations in 1995. The significant increase reflects the net earnings improvement along with improved working capital management. Adjusting the 1995 net loss of $158.3 million by both the $86.5 million loss recorded on the impairment of the Salty Snacks business and the Salty Snacks business operating loss of $25.6 million, yields a 1995 net loss of $46.2 million compared to 1996 net income of $9.3 million. The net earnings improvement of $55.5 million was achieved through increased revenues attributed to price increases, a more profitable sales mix, and cost reductions. Lower costs resulted from lower fixed overhead, reduced selling, distribution, and administrative expense resulting from headcount reductions, and more effective marketing spending. The improved cash provided by working capital resulted from a sustained improvement in cash collections of accounts receivable and higher accounts payable. The additional cash provided from working capital more than funded the combined $41.3 million of spending on plant and facility closing costs and severance, as a result of actions in connection with the Keebler and Sunshine acquisitions. Keebler believes that spending on plant and facility closing costs and severance should be substantially completed over the next two years. Only noncancellable lease obligations are expected to exceed such two-year time frame. Cash used by investing activities was $64.9 million in 1996 compared to $52.6 million in 1995. The cash used in 1996 was directly attributable to the $142.7 million used to finance the Sunshine acquisition. Offsetting this use of cash was the receipt of $32.6 million working capital adjustment paid by UB Investments (Netherlands) B.V. in connection with the Keebler acquisition and a $67.7 million source of cash received by the predecessor company resulting from the disposition of the Frozen Food businesses. Capital expenditures were $32.6 million and $55.4 million in 1996 and 1995, respectively. In 1996 under current management, capital projects were mostly designed to generate near-term cost savings and to complete the investment in improved management information systems. Capital expenditures in 1996 were down from the prior years reflecting the near completion of the installation of the Company's SAP R/3 management information system and tighter restrictions on additional capital expenditures. The Company believes that the capital expenditure program will continue at a level sufficient to support its strategies and operating needs. Cash flow provided from financing activities decreased $83.3 million in 1996 from 1995. In 1996, the $21.1 million cash provided from financing activities was comprised of $220.0 million in long-term debt borrowings of which $95.0 million was used to finance the Sunshine acquisition. An additional $125.0 million of borrowings represents the issuance of the Notes which was done to refinance the bridge loan used to finance the Keebler acquisition. Draw downs and repayments on the revolving loan facility were $37.2 million of which $19.0 million was used to finance a portion of the Sunshine acquisition. The remaining $18.2 million was used to finance working capital requirements. Offsetting these sources was $63.3 million paid by the predecessor company to settle commercial paper and revolving credit obligations and $2.4 million of principal payments on equipment obligations. The cash provided from financing activities of $104.4 million in 1995 was through commercial paper borrowings used to finance operating losses, capital expenditures, and cash spent on restructuring initiatives. LIQUIDITY The Company's liquidity in 1997 and 1996 was provided from a revolving loan facility. In 1996 available borrowings under the revolving loan facility were $155.0 million which was reduced to $140.0 million in 1997. Borrowings under the revolving loan facility in 1997 and 1996 were $32.8 million and $37.2 million, respectively, all of which had been repaid as of January 3, 1998 and December 28, 1996. In 1995, borrowings for the predecessor company were provided by a $200.0 million commercial paper program and a revolving credit agreement. Both the commercial paper program and revolving credit agreement were no longer available after the Keebler acquisition. Capital expenditures for 1998 are expected to be approximately $50.0 million, up nearly $2.0 million from 1997. The majority of capital spending in 1998 will be used to increase the automation in production and distribution facilities to obtain cost savings. The Company anticipates that capital expenditures will be funded from cash provided by working capital. 12 13 The Company historically has not paid dividends, currently does not anticipate paying dividends, and intends to retain all future earnings to fund the development and growth of the business. The existing Credit Agreement and the Notes place limitations on the Company's ability to pay dividends or make other distributions on its common stock. Additionally, the Credit Agreement requires the Company to meet certain financial covenants including net worth; earnings before interest, taxes, depreciation, and amortization; and cash flow and interest coverage ratios. In 1997 and 1996, the Company met all financial covenants in all of its financing agreements. Total debt was $298.8 million, $457.9 million, and $437.6 million as of January 3, 1998, December 28, 1996, and December 30, 1995, respectively. Current maturities on the total debt outstanding were $26.4 million, $18.6 million, and $286.5 million as of such respective dates. Cash and cash equivalents on January 3, 1998, December 28, 1996, and December 30, 1995 were $27.2 million, $12.0 million, and $3.0 million, respectively. Concurrent with the Offering, Bermore exercised a warrant in exchange for 6,135,781 shares of common stock. The exercise of the warrant resulted in the Company receiving $19.8 million of cash proceeds on February 3, 1998. At the time of the Offering, the Company was also required to make an offer to the holders of the Notes to purchase the Notes at 101% of the principal amount. None of the holders sold into the change of control offer on the Notes. The Company believes that available cash, as well as existing credit facilities, are sufficient to meet the Company's normal operating requirements for the foreseeable future. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which is effective in fiscal year 1998. The new statement establishes standards for reporting and the display of comprehensive income and its components (revenues, expenses, gains, and losses) in the financial statements. The statement requires all items recognized under accounting standards as components of comprehensive income be reported in a financial statement displayed with the same prominence as other financial statements. The Company has not yet determined the impact the new statement may have on disclosures in the consolidated financial statements. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective in fiscal year 1999. The new statement revises standards for public companies to report information about segments of the business and also requires disclosure of selected segment information in quarterly financial reports. The statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has not yet determined the impact the new statement may have on disclosures in the consolidated financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which is effective in fiscal year 1998. The new statement improves disclosures about pensions and other postretirement benefits to provide information to analyze: the benefit obligation, the fair value of the plan assets, and changes to the obligation and fair value of plan assets, including unrecognized gains and losses. In addition, the statement provides information on the quality of earnings, including recognized and unrecognized amounts used when projecting benefit costs and earnings of future periods. The Company has not yet determined the impact the new statement may have on disclosures in the consolidated financial statements. The FASB also issued certain other disclosure-related accounting pronouncements during 1997. While these new statements are effective for future reporting periods, the Company does not anticipate they will have any significant impact on the consolidated financial statements. SEASONALITY The Company's net sales, net income, and cash flows are affected by the timing of new product introductions, promotional activities, price increases, and a seasonal sales bias toward the second half of the year due to events such as back-to-school, Thanksgiving, and Christmas. The relative mix between cookie and cracker sales varies throughout the year with stronger cracker sales in the last quarter of the calendar year. 13 14 SELF INSURANCE The Company purchases insurance coverage for worker's compensation, general, product, and vehicle liability maintaining certain levels of retained risk (self-insured portion). Potential losses relating to claims under the self-insured portion of the policies are accrued in accordance with the requirements of SFAS No. 5, "Accounting for Contingencies." There are no unasserted claims that require a reserve or disclosure in accordance with SFAS No. 5. FORWARD-LOOKING STATEMENTS When used in this discussion, the words "believes" and "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, over which the Company has no control, which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligations to republish revised forward-looking statements to reflect events or circumstances after the date thereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this report, as well as the Company's periodic reports filed with the Securities and Exchange Commission. 14 -----END PRIVACY-ENHANCED MESSAGE-----